Market analysis on behalf of Rania Gule Market Analyst at

6th February 2024: The price of gold (XAU/USD) continues to decline in the late European session today, Monday, due to optimistic non-farm payroll data for January in the United States. Markets are pricing in expectations that the Federal Reserve will keep interest rates unchanged at the policy meeting in March, within the range of 5.25% – 5.50%. The strong job market data reinforces the argument for maintaining higher interest rates until the end of spring this year.

In my view, the strong demand for labor and the high average wages offered by employers in the United States suggest bright prospects for demand. This also indicates a continuation of the high inflation environment, requiring interest rates to remain elevated to prevent further increases.

Meanwhile, Minneapolis Federal Reserve President Neel Kashkari provided hawkish guidance on monetary policy today, stating that a neutral interest rate increase means monetary policy may be tightening, as believed. However, he warned against the rising costs of delay in tightening.

While gold prices are under pressure, expectations for U.S. bond yields and the U.S. Dollar Index (DXY) have significantly improved. The U.S. Dollar Index reclaimed the 104.00 resistance level for the first time in two months. At the same time, the Institute for Supply Management’s (ISM) services purchasing managers’ index for January focuses on representing the services sector, which accounts for two-thirds of the economy and is highly ideal and preferred for Federal Reserve inflation measurements.

In my opinion, the downward trend of the gold price extends to below $2020, as the latest employment data initially favored early interest rate cuts by the Federal Reserve before issuing strong and much higher-than-expected data. The demand for labor remained significant, and wage growth accelerated strongly in January, indicating stubborn inflation expectations.

Therefore, the optimistic employment data has strengthened the Fed’s argument for keeping interest rates higher for longer, somewhat aligning with market expectations.

In contrast to other G7 economies struggling to maintain stable labor market conditions, the performance of the U.S. economy stands out strongly, allowing the Fed to maintain a “high-interest rate” policy at least during the first half of this year.

Also, Federal Reserve Governor Michelle Bowman stated on Friday that the recent easing of price pressures is encouraging, but she cautioned against early interest rate cuts. She warned that early interest rate cuts may delay the decline in price pressures towards the 2% target, which could force officials to raise interest rates again. Amid expectations of the services purchasing managers’ index rising to 52.0 from 50.6, this supports the dollar’s strength, which dominates gold market price movements and pushes it toward medium and long-term declines.

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