Gold prices have been rebounding since Friday following the disappointing US jobs report. The number of new jobs created was once again lower than expected, at 559,000 compared to expectations of 650,000.
In addition, the participation rate, which measures the number of people working or actively seeking work compared to the labor force, fell to 61.6% from 61.7%, while the average in recent years before the pandemic began was around 63%.
This disappointing employment report diminishes fears of an overheating economy and therefore a normalization of the Fed's monetary policy. Indeed, the Fed should not start normalizing its policy until the job market has returned to its pre-crisis level.
The probability of a Fed rate hike by the end of the year fell from 11% at the beginning of the month to 6% on Friday, after the release of the NFP. As a result, long rates have fallen. The yield on U.S. 10-year bonds fell 7 basis points to 1.55%.
The price of gold took advantage of this to rebound thanks to the decline in real bond yields and the dollar. Indeed, U.S. real rates, i.e. adjusted for inflation expectations, continue to drive the gold price. The correlation between the two is negative. A decline in real rates means that bond yields are eroding, so investors prefer gold as a hedge against inflation.
The next economic releases will be crucial for the markets. The better the statistics, the faster the economy will return to its pre-crisis level and the faster the Fed will normalize its monetary policy. Normalization of monetary policy would be beneficial for cash and negative for other markets (stocks, bonds, precious metals).
The next key reports will be the employment reports, namely the JOLTS report released tomorrow, and the unemployment benefit registrations released every Thursday. The US Consumer Price Index for May is also expected on Thursday.
In terms of technical analysis, gold's trend continues to be bullish. Gold prices bounced off the bottom of its ascending channel on Friday thanks to the disappointing NFP. As long as gold does not break out from the bottom of its channel, the outlook remains technically bullish. The next major resistance will be the high of the year in January at around $1960.
(Chart Source: Tradingview 07.06.2021)
Should the channel break out from the bottom and fall below Friday's low at $1,855, the outlook would turn bearish. A correction to the mid-May low of $1808 would be expected.
Disclaimer: This material has been created for information purposes only. All views expressed in this document are my own and do not necessarily represent the opinions of any entity.