Gold Drops as the US Dollar Rises on Better-Than-Expected NFP Data
The gold (XAU) price dropped by 0.79% on Friday after better-than-expected US Nonfarm Payroll (NFP) report figures.
The US Dollar Index (DXY) and Treasury yields rocketed following a robust US NFP report, further decreasing chances for a rate hike by the Federal Reserve (Fed) in the near future. The report revealed 353,000 jobs created in January, greatly surpassing the forecast of 180,000. Robust job growth, fueled by a resilient economy and strong worker productivity, could bolster businesses to continue hiring and retaining staff, potentially safeguarding the economy from a recession this year. Despite a minor decline of less than 1% following the report, gold is 'holding on like a barnacle despite a whopper of an employment report,' noted Tai Wong, an independent metals analyst based in New York. 'But we might need to wait a little and see if gold grinds much lower,' he added. Market sentiment shifted after the release: the CME Fed Watch Tool now indicates that traders see a 70% chance of the rate cut in May, decreasing from 92% before the NFP data. Overall, high-interest rates decrease the attractiveness of non-yielding assets like bullion.
XAU/USD was declining during the Asian and early European trading sessions. Today, traders should focus on the US ISM Services Purchasing Managers' Index (PMI) at 3:00 p.m. UTC. Strong figures may pull XAU/USD towards 2,020 again. However, the short-term bearish trend in XAU/USD might reverse if the numbers are lower than expected. 'Spot gold may retest support at $2,028 per ounce, with a good chance of breaking below it and falling into a $2,010–$2,019 range,' said Reuters analyst Wang Tao.
EUR/USD Drops to a 7-Week Low as the ECB Looks More Dovish Than the Fed
The euro (EUR) lost 0.81% on Friday after a much better-than-expected US Employment Situation report, showing a strong rise in nonfarm payrolls and robust growth in average hourly earnings.
The upbeat US employment report has reduced the chances of near-term interest rate cuts by the Federal Reserve (Fed), boosting the US dollar and Treasury yields. EUR/USD now trades at a 7-week low, near a critical 1.07500 level, as investors' interest rate expectations have shifted dramatically. Friday's data has not only altered investors' short-term interest rate expectations but also changed their long-term outlook. According to the latest interest rate swap market data, investors now price in less than 120 basis points (bps) worth of rate cuts by the Fed but more than 130 bps cuts by the European Central Bank (ECB) by the end of 2024. The market now anticipates the ECB to be more dovish than the Fed, which is exerting downward pressure on the euro.
EUR/USD continued falling during the Asian session but started to recover in the early European trading hours. Today, two events might provoke extra volatility in all USD pairs: the US ISM Services Purchasing Managers' Index (PMI) at 3:00 p.m. UTC and Raphael Bostic's speech at 7:00 p.m. UTC. The ISM Services PMI report is more important and will likely produce an immediate market response. At the same time, Bostic's remarks may lack new details, so the market's reaction could be insignificant. If PMI figures are better than expected, the bearish trend in EUR/USD will likely continue, potentially dropping the pair below 1.07500. Conversely, EUR/USD may correct upwards if the numbers are below expectations.
USD/JPY Rises Above 148.000 as Chances for Rate Cuts by the Fed Decrease
The Japanese yen (JPY) plunged by 1.31% on Friday, losing all the gains it had made since 24 January.
Investors have decreased their expectations for aggressive rate cuts by the Federal Reserve (Fed) this year after the US Nonfarm Payroll (NFP) report underpinned a still resilient US economy. According to the CME FedWatch Tool, the probability of a 25 basis point (bps) rate cut in May is now less than 60%. At the same time, investors expect the Bank of Japan (BOJ) to start raising rates only in June. Thus, the relative divergence between the US and Japan's monetary policies continues to favor the US dollar.
Still, some analysts expect the BOJ to begin monetary policy tightening sooner. For example, Societe Generale analysts believe the regulator will raise interest rates and abolish its yield curve control policy in March, as they view the last monetary policy statement as hawkish.
'There were far fewer cautious opinions and a significant increase in positive opinions about policy revisions,' said Jin Kenzaki, head of Japan research at Societe Generale.
Kenzaki sees the BOJ raising rates towards 0% in March but thinks the bank will likely declare that it will support its 0% interest rate and quantitative easing policies until it has confidence in the stable realization of its 2% inflation target.
USD/JPY was rising in the Asian session but then started to decline during the early European trading session. The relative monetary policy is the most important driver of USD/JPY's exchange rate, so any macroeconomic data that shifts interest rate expectations will immediately impact the pair. Therefore, today's US ISM Non-Manufacturing Purchasing Managers' Index (PMI) at 3:00 p.m. UTC may cause extra volatility. Better-than-expected figures might push USD/JPY above 149.000. However, if PMI figures disappoint investors, USD/JPY may drop towards 147.700.