Gold price tumbles as Fed rate-cut hopes recede

• Gold price plunges for the second straight session as investors see Fed rate cut after spring.
• Robust demand for workers has tampered Fed rate-cut bets.
• The outlook for the US dollar and bond yields has improved significantly.

Gold price (XAU/USD) continues to face a sell-off in Monday’s European session due to upbeat United States Nonfarm Payrolls (NFP) data for January. Investors see the Federal Reserve (Fed) keeping interest rates unchanged in March’s monetary policy meeting in the range of 5.25%-5.50% as robust labor market data has strengthened the argument for maintaining higher interest rates till Spring ends.

Strong labor demand and higher wage offerings by US employers to retain or hire workers indicate a bright demand outlook. This has also indicated a persistent inflation environment, and therefore, interest rates must remain higher to prevent further escalation.

While the Gold price has come under pressure, the outlook for US bond yields and the US Dollar Index (DXY) has improved significantly. The USD Index has recaptured the 104.00 resistance for the first time in two months. Meanwhile, the US Institute of Supply Management (ISM) Services PMI for January is in focus representing the service sector, which accounts for two-thirds of the economy.

Daily Digest Market Movers: Gold price falls sharply ahead of US ISM Services PMI data

• Gold price extends its downside to near $2,023 as the latest employment data has tampered bets in favor of early rate cuts by the Federal Reserve.
• The CME FedWatch tool shows that a rate-cut move in the March policy meeting is out of the picture now, while bets for May are still meaningful.
• The labor demand remained upbeat, and wage growth accelerated robustly in January, indicating a stubborn inflation outlook.
• The upbeat employment data has strengthened Fed policymakers’ argument supporting interest rates remaining higher for somewhat longer than market expectations.
• On Friday, the United States Bureau of Labor Statistics (BLS) reported that payrolls increased by 353K in January, almost doubled from the consensus of 180K, and remained higher from upwardly revised December’s figures of 333K.
• Average Hourly Earnings grew strongly by 0.6% against expectations of 0.3% and the prior increase of 0.4%. The annual wage growth was higher by 4.5% vs. the estimated 4.1% and the former reading of 4.4%. Annual Average Hourly Earnings for December were revised from 4.1% to 4.4%.
• Unlike other Group of Seven economies struggling to maintain steady labor market conditions, the US economy is outperforming with a strong gap, allowing Fed policymakers to emphasize maintaining the “higher interest rates” narrative at least for the first half of this year.
• On Friday, Fed Governor Michelle Bowman said that the recent decline in price pressures is encouraging but cautioned about early rate cuts. She warned that premature rate cuts could delay the decline in price pressures toward the 2% target, which could force policymakers to raise interest rates again.
• Meanwhile, the USD Index has printed a fresh seven-week high at 104.20 ahead of the US ISM Services PMI for January, which will be published at 15:00 GMT.
• Investors anticipate that Services PMI increased to 52.0 from 50.6 in December.

Technical Analysis: Gold price drops to near $2,020

Gold price delivers a steep downside move as investors see a rate cut by the Fed delayed to May. The outlook for the precious metal has dampened as it has failed to sustain the breakout of the Symmetrical Triangle chart pattern formed on a daily time frame. The yellow metal has dropped below the 20 and 50-day Exponential Moving Averages (EMAs), which hover near $2,033 and $2,022 respectively.

The 14-period Relative Strength Index (RSI) oscillates in the 40.00-60.00, which indicates a lackluster move ahead.