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Gold rises on dollar weakness after weak ADP data

  • Gold rallies as ADP figures confirm the US labor market is cooling.
  • The overall bullish trend of the precious metal loses momentum as the Dollar regains lost ground.
  • New evidence that the US is heading for a soft landing underpins demand for Gold.

The prices of Gold (XAU/USD) have risen after the publication of the ADP employment figures in the US, weaker than expected. The pair is approaching Tuesday’s highs at $2,040, having found support at the psychological level of $2,000, on its pullback from all-time highs of $2,150.

US Treasury yields have turned lower as weak ADP cast doubt on Friday’s Nonfarm Payrolls data. These figures confirm that the US labor market is losing momentum, adding reason to think that the Federal Reserve (Fed) could begin to ease its monetary policy early next year.

Tuesday’s data offered a mixed picture. The US ISM services index beat expectations, but the JOLTS survey of US job openings showed the labor market is starting to feel the pinch of higher interest rates.

Investors’ attention is now focused on the nonfarm payrolls report, due out on Friday, which will be watched with interest for new clues about the Federal Reserve’s monetary policy plans.

Daily Market Moves Summary: Gold advances as ADP strengthens case for Fed cuts in 2024

  • Gold prices rose after the ADP employment report was released, which showed a lower than expected figure in October.
  • The US economy created 103,000 new jobs in November, well below the 130,000 expected. The October reading has been revised downward to 106,000 from the previously estimated 113,000.
  • These figures follow Tuesday’s JOLTS US job openings survey, and add to evidence that tight monetary policy is beginning to impact demand for workers.
  • On the other hand, the US ISM services PMI showed a greater improvement than expected, which rules out a sharp slowdown in the US economy.
  • CME Group’s FedWatch tool values ​​the chances of the US central bank cutting its reference rate by 25 basis points in March at more than 50%.
  • Markets are moderately positive on Wednesday, with investors increasingly convinced that the tightening cycles of major central banks have come to an end.
  • The latest data confirm the slowdown in US growth and the weakening of the labor market, in line with the hypothesis of a soft landing. This hurts the dollar and US yields, and is good news for precious metals.
  • News that Moody’s has cut China’s credit outlook to negative due to rising debt risks is dampening risk appetite.

Technical Analysis: Gold prices continue to consolidate below $2,040

From a technical point of view, gold prices continue to consolidate. The bearish attempts are contained above the key support zone of $2,000, while the bullish attempts are limited below the $2,040 level.

The overall uptrend has lost steam after breaking the 50% Fibonacci level of the bull run from November 13 to December 5. Furthermore, Gold’s inverse correlation with a stronger US Dollar suggests that a further decline should not be ruled out.

On the downside, a confirmation below the $2,000 support zone would negate the overall uptrend and increase the bearish pressure towards $1,950 and $1,932.

To the upside, a bullish reaction above $2,040 would clear the way towards $2,067, before the all-time high of $2,150.

Price of the US Dollar this week

The following table shows the percentage change of the United States Dollar (USD) against the main currencies quoted this week. The US Dollar was the weakest currency against the Canadian Dollar.

What does the Federal Reserve do and how does it affect the US dollar?

The monetary policy of the United States is determined by the Federal Reserve (Fed). The Fed has two mandates: achieving price stability and promoting full employment. Your main tool to achieve these objectives is to adjust interest rates.
When prices rise too quickly and inflation exceeds the 2% target, the Federal Reserve raises interest rates, raising borrowing costs throughout the economy. The result is a stronger dollar, as it makes the United States a more attractive place for international investors.
When inflation falls below 2% or the unemployment rate is too high, the Federal Reserve can lower interest rates to encourage borrowing, which weighs on the greenback.

How often do you hold monetary policy meetings?

The Federal Reserve (Fed) holds eight monetary policy meetings a year, at which the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
Twelve Fed officials participate in the FOMC: the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the eleven presidents of the remaining regional Reserve banks, who serve for one year on a rotating basis.

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

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

What is Quantitative Tightening (QT) and how does it affect 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 of maturing bonds in its portfolio to buy new bonds. It is usually positive for the value of the US dollar.

Source: Fx Street

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