More Gains for Gold After Weaker PMI

Although Monday’s manufacturing PMI was the opposite, showing slight expansion when greater contraction had been expected, very strong sentiment has propelled gold to a key psychological area. The Federal Reserve (‘the Fed’) still seems to be considering a cut in June. This article summarises recent news and sentiment affecting the outlook for the Fed’s policy and looks briefly at the charts of XAUUSD and USDJPY.

Jerome Powell reiterated in comments on Wednesday that the Fed needs more evidence that inflation is moving sustainably towards 2% before cutting rates. For the moment, there’s definitely no sign that this is happening:

Inflation has stuck around 3% and not moved lower in nearly a year. Now that the price of oil has risen significantly since the end of 2023, there’s likely to be more upward pressure on prices. The job market is another important factor: with the NFP having consistently beaten the consensus for many months, another higher figure would probably lead to inflation also coming in higher.

Meanwhile there’s no strong consensus on what the Fed might do in June. Although 1 May’s meeting seems nearly certain to result in a hold, only around 55% of participants expect a cut the month after:

The chances of a single cut and a hold have fluctuated slightly in the last month but not very much. 55-60% isn’t by any means a guarantee that a cut’s coming this summer: the likelihood might change significantly depending on the actual result of March’s inflation and, to a lesser extent, the job report for March.

These are the two critical releases affecting gold and generally the dollar over the next few days. 5 April’s NFP could influence expectations for inflation on 10 April, which in turn is important for how long the Fed is going to remain hawkish.

It seems more reasonable for the Fed to err on the side of caution and avoid cutting rates too quickly. A generally strong economy in the USA based on GDP and jobs means there’s no pressing hurry to be more accommodative to avoid a slowdown. Equally, predictions for the start of the pivot this year have been pushed steadily further back since January, so there’s no obvious reason for there not to be another delay.

Gold, Daily

Gold hasn’t clearly broken through $2,300, so for the time being this area is still active as a resistance and might trigger a consolidation. Looking for a counter-trend trade in the context of such a strong uptrend is extremely risky, but an immediate breakout upward is also questionable.

The overbought signal is clear from both Bollinger Bands and the slow stochastic. A high ATR coming up on December’s readings above $29 might suggest that at least this phase of the trend is mature and the consolidation could be extended. However, that depends on the important upcoming data, the NFP and inflation.

Above $2,300, $2,320 seems like a possible resistance, the 100% weekly Fibonacci extension. As in the second half of March, waiting for a retracement lower would traditionally give a less risky entry for a new buyer, but it’s challenging to pinpoint where the endpoint of the next retracement might be.

A move back below $2,200 seems very unlikely in the next few days unless upcoming releases are surprising. However, a possible retracement in the near future might be minimal like in March.

Dollar-yen, Daily

Although still strongly affected by developing predictions for the funds rate this summer, whether and when the Bank of Japan or the Japanese government might intervene to support the yen has been a more important intrigue for dollar-yen in recent weeks. Despite the BoJ’s exit from 14 years of negative rates, many participants expect the current loose policy to continue for some time.

¥151.95, reached on 3 April, is a 34-year high for USDJPY. As the next significant round number, ¥155 seems like an obvious place for the BoJ to intervene again, so traders are likely to be cautious if the price does continue further up. Equally, with the NFP and inflation coming up in the next several days, usually one would expect large traders to avoid positions until after the results given their unpredictable nature.

Momentum on the chart has also been much lower as the price has tested ¥152 for the third time since October last year. With the slow stochastic consistently signalling overbought since late March and ATR declining to new lows, it’d be possible to see a significant correction depending on upcoming economic data.

Most of the time, second and subsequent tests of important areas are less likely to break through unless accompanied by a strong fundamental driver. Conversely, there’s no clear reason technically and definitely not fundamentally for a reversal of the uptrend.

If the price does retrace in the near future, the main targets would probably be the 50 SMA from Bands around ¥150, the 200 SMA around ¥148 and then March’s low near ¥146.60. Volatility will almost certainly increase significantly in the next few days as the USA releases important data.