Buyers in control as $2,500 support holds ahead of US Non-Farm Payrolls

• Gold stabilized above $2,500 after testing that level earlier in the week.
• The technical outlook shows that the uptrend of XAU/USD remains unchanged in the short term.
• Key US data, including Nonfarm Payrolls, could trigger the next big move in Gold.

After a quiet start to the week, gold (XAU/USD) briefly dipped below $2,500 following a broad rally in the US dollar (USD). Although the precious metal struggled for bullish momentum, it managed to stabilize above $2,500 ahead of next week’s release of key US macroeconomic data.

Gold remains within striking distance of all-time highs

After ending the previous week on an upbeat note following Federal Reserve (Fed) Chairman Jerome Powell’s dovish remarks at the Jackson Hole Economic Symposium, gold posted small gains on Monday and Tuesday. However, in the absence of underlying factors, the yellow metal’s growth has remained limited.

Renewed strength in the US dollar (USD) sent gold heading south mid-week. The negative shift seen in the markets’ risk-on mood ahead of Nvidia’s quarterly earnings helped USD find demand as a safe haven, pulling XAU/USD slightly below $2,500. However, the pair managed a late US session comeback and ended the day above this level.

Upbeat US macroeconomic data helped the USD hold up on Thursday. The Bureau of Economic Analysis (BEA) announced that it revised annualized gross domestic product (GDP) growth for the second quarter to 3 percent, from 2.8 percent in the previous estimate. In addition, there were 231,000 first-time claims for unemployment benefits in the week ended Aug. 24, down slightly from 233,000 the previous week, the Labor Department reported. Technical gold sellers sat on the sidelines as $2,500 proved to be strong support, allowing XAU/USD to ignore the ongoing USD recovery.

Meanwhile, weak inflation data from Germany caused the euro (EUR) to weaken against its rivals on Thursday. XAU/EUR gained over 1% on the same day, suggesting that gold has captured capital outflows from the euro.

US inflation, as measured by the change in the price index for personal consumption expenditures (PCE), held steady at 2.5% on an annual basis in July, the BEA reported on Friday. The core PCE price index, which excludes volatile food and energy prices, rose 2.6 percent in the same period, matching June’s increase and falling below the market forecast of 2.7 percent. The core PCE price index rose 0.2% on a monthly basis, as expected. These numbers failed to influence trading action and gold remained in its daily range above $2,500 ahead of the weekend.

Gold investors await US labor market data

US financial markets will remain closed for the Labor Day holiday on Monday. On Tuesday, the ISM Manufacturing Purchasing Managers (PMI) index for August will be presented in the US economic list. Investors expect the headline PMI to rise to 47.8 from 46.8 in July. A reading above 50, which would suggest business activity in the manufacturing sector has returned to expansion territory, could provide USD with an immediate reaction boost and weigh on XAU/USD.

On Thursday, US ADP Employment Change and ISM Services PMI data will be looked at for further impetus. Market reaction to the data is likely to be direct and short-lived, with positive surprises supporting the USD and negative prints hurting the currency, ahead of Friday’s highly anticipated August jobs report.

US non-farm payrolls (NFP) are expected to rise by 163,000 in August, following a disappointing increase of 114,000 in July. The unemployment rate is expected to fall to 4.2% from 4.3%, and monthly wage inflation, as measured by the change in average hourly earnings, is seen rising 0.3%.

While speaking at the Jackson Hole Economic Symposium, Fed Chairman Powell said they will do everything in their power to support a strong labor market while making further progress toward price stability. Similarly, “we want the labor market to stay where it is, we have to adjust the policy rate to keep it there,” San Francisco Fed President Mary Daly noted earlier in the week.

Fed policymakers made it clear after the policy meeting in July that they are shifting their focus to the labor market on growing signs of worsening conditions. Therefore, even a small divergence from market consensus in the NFP reading could trigger a big reaction in Gold. A better-than-forecast print could prompt investors to refrain from pricing in aggressive Fed policy easing and fuel a strong rally in the US dollar, weighing on gold. According to CME’s FedWatch tool, markets currently see a nearly 70% probability that the Fed will cut the policy rate by a total of at least 100 basis points by the end of the year. On the other hand, a second consecutive weak NFP print could open the door for another low in US Treasury yields and the USD, allowing XAU/USD to push higher into the weekend.

Commerzbank commodity strategist Carsten Fritsch argued in a recent report that gold does not have significant near-term upside potential:

According to Bloomberg, gold ETF holdings rose by 15 tonnes last week to a six-month high. Speculative interest is particularly strong. The net long position of speculative investors increased to about 193,000 contracts in the week to August 20, at the same time that gold reached an all-time high, the highest level in almost four and a half years,” Fritsch said.

“Much of the positive news for gold may therefore have already been priced in. We feel justified in our view that gold does not have significant upside potential at the moment. We see more room for the other three precious metals that have not caught up with gold in recent weeks,” he added.

Gold technical outlook

Gold’s short-term technical outlook suggests that the bullish trend remains intact. The Relative Strength Index (RSI) indicator on the daily chart remains near 60 and XAU/USD continues to trade in the upper range of the ascending retracement channel from mid-February.

Immediate support is located in the $2,500-$2,490 area (psychological level, the midpoint of the ascending regression channel) ahead of $2,475, where the 20-period Simple Moving Average lines up. A daily close below the latter could open the door for an extended slide towards $2,420 (50-day SMA).

On the upside, static resistance appears to have formed at $2,530. Once gold rises above this level and confirms it as support, it could target the upper limit of the ascending channel at $2,600.