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XAU/USD rallies on Fed meeting as traders eye Friday’s jobs data

February 2, 2023

NEW YORK (Feb 2) Gold has climbed to a 9-month high aided by the Federal Reserve’s failure to convince investors of his hawkish stance, which prompted a rally in markets. The initial reaction to the 25bps hike was pretty bland as it was accompanied by a statement that alluded to the need to see further rate hikes in the future. The moves came when the press conference started and it led - very successfully by the questions asked by reporters -Chairman Powell to manoeuvre through his answers, leading him to conclude with the fact that he sees inflation returning to 2% without a significant decline in economic activity or a dramatic increase in unemployment.

Gold (XAU/USD) took advantage of the positive sentiment and advanced 1.7% once the press conference started, pushing above the previous yearly high at 1,949 on January 26th. Back then, as sentiment cooled market-wide on worsening US economic data, XAU/USD retraced back towards 1,920 as it looked to consolidate further buying momentum.

As the US dollar picks up some bids this morning, gold is struggling to carry on yesterday’s rally having found resistance at 1,960 and pulling back to undo the daily gains. Looking at the RSI it is toying with the 70 (overbought) line but it's starting to flatten out. It's also important to note that it has failed to keep up with price and break above the high from January 25th, meaning that a bearish divergence is in place. 

XAU/USD daily chart

XAU/USD daily chart. Photo: Source: tradinview

As gold bulls catch their breath I expect their focus to shift towards the US jobs data out on Friday. Throughout 2022 the shift in momentum happened once markets perceived that the risk of recession was greater than the risk of inflation, which started taking effect in November once the consumer inflation readings were showing the start of disinflation, alongside a small pickup in the unemployment rate.

Whilst a chunk of the momentum in January has been on the back of the reopening in China and the increase in bullion purchases from central banks, the last few sessions have started to undermine the recession hedge appeal. The move yesterday after the Fed’s meeting can be seen to suggest that the softer landing scenario benefits gold buyers, something that contradicts its safe-haven appeal. It simply might have been a case of going with the flow and embracing the risk-on sentiment, or even the fact that inflation concerns keep on falling, but it will be something to monitor in the coming weeks. 

Looking ahead at Friday’s NFP data, a weaker jobs reading, which may include another small pickup in unemployment, should favour gold buyers as the soft landing hopes get outweighed by recession fears. But given how XAU/USD has been trading in recent weeks we may not see that link unfold. In fact, equities and broader risk-on may be the force pushing gold prices higher if it is perceived to favour the slowdown in the Fed’s hawkishness over concerns about recession.

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