Gold Forecast: Short-term bullish trend reversal likely on weak US NFP data

Gold [XAU/USD] is trading in a sideways manner at the two-month low of $1270 ahead of the US non-farm payrolls data. The consensus is that the US economy added 90,000 jobs in September, down from 156,000 in August due to disruptions caused by hurricanes in the country.

The jobless rate is seen remaining steady at 4.4% in September. The average hourly earnings are seen rising 0.3% m/m in September vs. 0.1% growth seen in August. As discussed here, the lead indicators say the actual NFP print could beat the estimates.

The American Dollar is well bid across the board this Friday following a string of hawkish comments from the Fed officials and strong economic data releases this week.

Oct NFP report won't have much impact on Fed monetary policy

Kathy Lien from BK Asset Management writes, "unlike past NFPs, this month's report won't have as much impact on the Federal Reserve's monetary policy plans and the dollar for 2 reasons.

#1 - First the Fed isn't expected to raise interest rates again until December and there are 3 labor market reports between now and then to evaluate. 

#2 - Second, this report will be distorted by the hurricanes. After Hurricane Katrina in 2005 the Bureau of Labor Statistics reported an initial loss of -35K jobs, but one month later, it was revised to an increase of 67K jobs. So the prospect of revision and distortion means that market participants, including the Fed, will discount any significant weakness. 

Lin adds, "therefore the initial decline on a softer report should be short-lived, but if job growth beats expectations and rises by 80K or more, the Dollar will rise quickly and aggressively as the data shows only limited setback from the hurricanes."

I agree that the USD could quickly regain the bid tone following a softer report, although Gold could still witness a short-term bullish trend reversal. This is because the 4-hour chart shows potential bullish price-RSI divergence-

4-hours chart

• Since September 21, the price has consistently printed lower lows, while the RSI has printed higher lows.
• A classic bullish price RSI divergence would be established if the NFP and wage growth numbers miss estimates... Note that prices have already exited the bigger falling channel. Thus, a bullish-price RSI divergence (on weak data) would mean the metal has found a short-term bottom around $1270 and prices could revisit $1300 over the next week.
• Meanwhile, the strong wage growth number could push the yellow metal down to $1262 [61.8% Fib retracement] and $1261 [200-DMA].