Gold started the week under selling pressure and declined toward $1,620 on Monday before staging a rebound and closing four straight days in positive territory. XAU/USD ended up snapping a two-week losing streak ahead of next week’s ISM PMI surveys and the September jobs report.
The turmoil in global bond markets caused by the UK gilt sell-off at the beginning of the week weighed on the low-yielding gold. With the benchmark 10-year US Treasury bond yield rising toward 4% on Monday, XAU/USD turned south and registered its lowest daily close since March 2020 at $1,622.
The yellow metal shook off the bearish pressure on Tuesday and closed the day modestly higher. The monthly data published by the Conference Board showed that the Consumer Confidence Index in the US improved to 108.00 in September from 103.6 in August. Although the dollar gathered some strength with the initial reaction, the underlying details of the publication revealed that the 1-year Consumer Inflation Rate Expectations declined to 6.8% from 7%, limiting the USD’s upside.
On Wednesday, the Bank of England (BoE) intervened in the gilt market and triggered a sharp decline in global bond yields. The UK central bank announced that it will carry out temporary purchases of long-dated government bonds to restore market functioning. Led by a 10% decline in the 10-year UK gilt yield, the 10-year US T-bond yield lost more than 5% and allowed inversely-correlated gold to gather bullish momentum. XAU/USD rose nearly 2% and posted its largest one-day gain since late March.
The BoE’s action pulled markets’ interest away from the greenback and paved the way for an overdue correction in the US Dollar Index (DXY). With the dollar facing strong bearish pressure, the DXY fell more than 2% in the second half of the week. During the Asian trading hours on Friday, the data from China showed that the NBS Manufacturing PMI rose into the expansionary territory above 50 in September from 49.4 in August and helped gold advance to its highest level in a week above $1,670 on Friday.
Meanwhile, the US Bureau of Economic Analysis (BEA) reported on Thursday that the real Gross Domestic Product (GDP) contracted at an annualized rate of 0.6% in the second quarter. This reading matched the previous estimate and the market expectation, failing to generate a noticeable market reaction. The BEA announced on Friday that the Personal Consumption Expenditures Price Index declined to 6.2% on a yearly basis in August from 6.4% in July. The core PCE inflation, however, rose to 4.9% in the same period making it difficult for gold to preserve its bullish momentum.
It’s also worth noting that the People’s Bank of China (PBoC) introduced measures to limit the CNY’s depreciation this week. The PBoC reinstated the reserve requirement rule for banks’ forward sales of CNY by raising the required ratio to 20% from 0%. In case this action has the intended impact on the CNY’s exchange rate, the Chinese demand for gold could improve and support the price.
Market participants will keep a close eye on global bond markets next week. The UK gilt market seems to have stabilized following the BoE’s intervention but investors could quickly lose confidence in case the UK government fails to address concerns over the economy getting pushed toward an unsustainable debt path. Another bout of the global bond sell-off could weigh on the precious metal. On the other hand, if the UK provides further relief to gilt markets by readjusting the fiscal policy, another leg lower in bond yields should help gold stretch higher.
The US economic docket will feature the ISM Manufacturing PMI data, which is expected to remain unchanged at 52.8 in September, on Monday. The inflation component of the survey, the Price Paid Index, fell to 52.5 in August and a reading below 50 in September would point to falling input prices for the manufacturing sector and lift XAU/USD. On Wednesday, the ISM will release the Services PMI report. Price pressures were relatively strong in the service sector in August with the Prices Paid Index arriving at 71.5. A significant deceleration in the service sector inflation is likely to hurt the dollar and vice versa.
On Friday, the US Bureau of Economic Analysis will publish the September jobs report. Nonfarm Payrolls are expected to rise by 250,000 following August’s increase of 315,000. Weekly Initial Jobless Claims have been steadily declining since mid-Summer but employment components of August PMI surveys showed a significant slowdown in employment growth in the private sector.
According to the latest Summary of Projections (SEP), Fed officials see an Unemployment Rate of 3.8% by year-end and 4.4% by the end of 2023. Policymakers made it clear that they will prioritize battling inflation and continue to hike rates until they see signs of unemployment rising steadily. Hence, labor market figures for September are unlikely to impact the Fed’s policy outlook in a significant way. Nevertheless, investors could see a weaker-than-forecast NFP growth as an excuse to sell the dollar and open the door for bullish action in XAU/USD ahead of the weekend. On the flip side, market participants could look to add to their dollar longs if the NFP increases at a stronger pace than projected.
Gold faces immediate resistance at $1,680, where the 20-day SMA is located. In case the yellow metal rises above that level and starts using it as support, it could target $1,690 (Fibonacci 38.2% retracement of the latest downtrend) and $1,700 (psychological level). Ideally, the Relative Strength Index (RSI) indicator on the daily chart would hold above 50 in that scenario and confirm the bullish shift in the technical outlook.
On the downside, $1,665 (Fibonacci 23.6% retracement) aligns as first support before $1,650 (static level). A daily close below the latter could be seen as a significant bearish development and cause XAU/USD to decline toward the end-point of the downtrend at $1,620.
The FXStreet forecast poll paints a mixed picture for gold in the one-week and one-month outlooks. Average targets for these time periods are located at $1,666 and $1,690, respectively.