Gold rallies as soft labor demand supports a stable interest rate policy

Gold price breaks above $1,940.00 as US ADP Employment data turns out softer than expected.
US firms invited fewer applications for jobs in July as resignations dropped.
Investors hope that the Fed will not raise interest rates further this year.

Gold price (XAU/USD) extended rally as US Automatic Data Processing (ADP) reported that Employment Change for August missed estimates. The US private sector recorded fresh additions of 177K payrolls, lower than estimates of 195K and July's print of 324K. Four-month outperformance streak by US private employment comes to a halt as firms' hiring slows due to poor economic outlook.

The precious metal capitalized on softer job openings data on Tuesday, which accelerated hopes of an unchanged interest rate decision to be taken at the September monetary policy meeting by the Federal Reserve (Fed). Employees’ declining confidence in the labor market gave comfort to Fed policymakers for keeping current interest rates at 5.25-5.50%.

Private sector employment data for August carries higher significance as Fed Chair Jerome Powell promised that further policy action will be data-dependent at the Jackson Hole Symposium. Weak labor demand from US private payrolls could allow Fed policymakers to discuss rate cuts sooner rather than later.

Daily Digest Market Movers: Gold price extends upside as US labor market loses resilience

Gold price attempts a breakout after consolidating in a narrow range above $1,930.00 as US ADP Employment Change data for August turns out softer than expected.
Four-month outperformance spell by US ADP Employment Change comes to a halt as the private sector witnessed fresh additions of 177K, lower than expectations of 195K and July's reading of 324K.
After downbeat Job openings data, a slowdown in hiring momentum indicates that the US labor market is losing its resilience.
August labor market data carries significant importance as Fed Chair Jerome Powell conveyed at the Jackson Hole Symposium that inflation has become more responsive to the labor market.
On Tuesday, the US Bureau of Labor Statistics reported that labor demand softened in July. Employers invited job applications for 8.827M vacancies against 9.165M job openings in June.
Meanwhile, the number of resignations was their lowest since early 2021. This indicates that either US firms are working on retaining talent or the labor force lost confidence.
Softening of key US job data indicates that the labor market is losing its resilience and elevates hope for the Fed’s soft landing.
Weaker than anticipated job openings data elevated hopes of a steady interest rate decision by the Fed at the September FOMC meeting. As per the CME FedWatch Tool, there is an 86% chance of interest rates staying at 5.25-5.50%. Also, the odds of an unchanged interest rate policy at the November meeting jumped above 50%.
If US hiring momentum slows further, the synergic effect of poor job vacancies and easing recruitment will make Fed policymakers comfortable with keeping the monetary policy unchanged this year.
In addition to US Job Openings data, Consumer Confidence reported by the US Conference Board dropped sharply to 106.1 as fears of persistent inflation renewed.
Investors hope that inflation in excess of the desired rate will be a hard nut to crack. Also, consumers' 12-month inflation expectations rose to 5.8% from 5.7% last month.
Last week, Cleveland Fed Bank President Loretta Mester supported one more interest rate hike in 2023 to ensure that the goal of price stability is achieved before 2026.
In this data-packed week, investors will shift their focus toward the Nonfarm Payrolls (NFP) data for August, which will provide an in-depth status of labor market conditions.
Apart from the US NFP, ISM Manufacturing PMI data will also be on investors’ radar. Market participants hope that factory activities will remain below the 50.0 threshold for the ninth straight month.
The US Dollar Index delivers a gradual recovery after an intense sell-off move to near 103.40. However, the downside bias is still solid as the Fed is expected to pause the policy tightening spell sooner.
Meanwhile, 10-year US Treasury yields dropped to near 4.15%, indicating higher bets for a soft landing by the Fed.

Technical Analysis: Gold price approaches $1,940

Gold price attempts a break above $1,940.00 after a sideways performance as US private employment data has replicated soft job openings data. After a stellar rally, the precious metal reaches near the upper portion of the Rising Channel chart pattern formed on a small time frame. The yellow metal extends its recovery above the 20 and 50-day Exponential Moving Averages (EMAs), which indicates that the mid-term trend has turned bullish.

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

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