Gold Price Analysis: XAU/USD set to decline below $1,860 as USD rebounds

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Update: Gold prices continue to slide lower against the US dollar. As of writing, XAU/USD trades at $1,861 with 0.5% losses. The greenback gathered momentum on the upbeat US economic data released on Thursday. The strong labor market condition fuels the fear of persistent inflation and a sooner than expected rollout of the ultra-accommodative Fed’s policy. The US 10-year benchmark ticked higher at 1.63% amid strong economic data, which weighed upon gold prices. Investors reduced their investment in the non-yielding asset in anticipation of the rate hike.

Gold (XAU/USD) bears take a breather around $1,870, following the heaviest drop since late February, amid Friday’s initial Asian session trading. While the fundamentals keep highlighting the Fed’s taper and pamper the sellers, the bounce off $1,865 support zone seems to prepare gold for another wild move with the US Nonfarm Payrolls (NFP) and Fed Chairman Jerome Powell on the calendar.

A jump in the early signals of the US jobs data, mainly the ADP and weekly Jobless Claims, joined record ISM Services PMI and renewed hopes of tapering. Also favoring the policy adjustment woes could be the Fed’s trimming of portfolio sales, one of the programs set to support the economy throughout the pandemic. With the market’s fear of lesser money supply putting a bid under the US Treasury bonds and the US dollar, gold dropped the most since February 26 the previous day.

That said, chatters over US President Biden’s readiness to ease the tax rate proposal and improving covid conditions may offer a mild pullback to gold prices amid a pre-NFP trading lull.

Against this backdrop, S&P 500 Futures remains on the back foot around 4,180, down 0.05% after Wall Street benchmarks dropped during Thursday’s risk-off session.

Moving on, Fed’s Powell could offer intermediate entertainment by defending the easy money policy but gold traders will be more interested in NFP for confirmation.

Read: US May Nonfarm Payrolls Preview: Analyzing major pairs' reaction to NFP surprises

The gold price has been whacked on Thursday as the US dollar burst into life ahead of a highly anticipated Nonfarm Payrolls event on Friday.

The greenback, measured vs a basket of currencies in the DXY index, is trading close to the highs of the New York session at 90.51, up 0.67% having rallied from a low of 89.8870 to a high of 90.5510 so far.

Gold, on the other hand, is trading near the lows of the day down at $1,871, losing 1.92% after dropping like a stone from a high of $1,909.69 to a low of $1,865.36. In doing so, it has broken a key area of near term support and brings the longer-term charts and downside targets into focus; (More on that below).

Meanwhile, the spotlight is on the US economic recovery, inflation and the Federal Reserve.

Stronger-than-expected US jobs data that suggested an improving labour market has reinforced signs that the world's largest economy is well and truly on its way towards a post covid recovery which should entice the Fed to act sooner than later.

For instance, Dallas Fed's CEO Robert Kaplan has repeated today, ''it's my view it would be better to ease off the QE accelerator gradually sooner rather than having to hit the brakes later.''

Meanwhile, and as for data and a potential prelude to tomorrow's NFP, the US private payrolls increased by 978,000 jobs in May, the ADP National Employment Report showed.

This was the biggest increase since June 2020 and way higher than what economists polled by Reuters had forecast in an increase by only 650,000 jobs.

At the same time, US initial jobless claims dropped below 400,000 last week for the first time since the COVID-19 pandemic started more than a year ago.

Such improvements in data could set the tone at central bank meetings later this month.

For NFP, Wall Street economists' consensus forecast was for 650,000 new US jobs last month.

Meanwhile, the ISM Sevices data was released today as well, and the greenback's momentum stalled around the same time of the release potentially due to the employment component that slid from 58.8 in April to 55.3. That is not promising ahead of tomorrow's NFP considering the vast majority of jobs created in a post-pandemic world would be expected to be in the services sector.

Nevertheless, the market may continue to take the view that no matter how strong of a bounce-back in jobs creation, the fact of the matter is that the US economy is recovering at a faster pace than what the Fed might have imagined this time a year ago.

Moreover, the Federal Reserve has already started to unwind some of its asset purchases.

On Thursday, the New York Fed said it would start to gradually offload its portfolio of exchange-traded funds that invest in corporate bonds on June 7, the first step in unwinding corporate bond holdings acquired during the pandemic.

Meanwhile, the greenback was already on solid footing ahead of the economic reports, as currency investors bet that data will come out better than market forecasts.

Additionally, risk sentiment deteriorated as investors turned cautious which tends to help firm up the greenback.

However, other factors at play, such as a weaker crypto space as well as recent moves throughout this week by the People's Bank of China that has essentially intervened to weaken the onshore yuan, are helping to support the greenback and consequently weigh on gold prices.

This keeps traders looking to USD/CNY for broader market direction and further strength could suggest more of a squeeze on latent short-USD positions.

As for inflation prospects, analysts at TD Securities note that ''global food prices increased at the fastest rate in a decade according to the UN, fueling the markets inflation fears.''

On the flip side of this, the analysts warned, ''if inflation is indeed transitory, then we are likely to see a prolonged period of uber-easy monetary policy, which suggests that market pricing for Fed hikes is too hawkish and ultimately that gold prices could firm further.''

Gold technical analysis

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