Gold likely to see another week of volatility

The decline in US nonfarm payrolls (NFP) to 57,000, compared to the expected 114,000, along with a notable downward adjustment of last month’s figures to 129,000 from 172,000, indicates that job growth in the US has slowed and did not increase as much as previously estimated. Surprisingly, the unemployment rate dropped from 4.3 percent to 4.2 percent.

The unemployment report paints a mixed picture, clearly suggesting a slowdown in momentum and a weakening in hiring. However, wage growth, coupled with the lower unemployment rate, implies that the labour market has not been severely impacted.

This situation is likely to alleviate pressure on the Federal Reserve’s decision-makers regarding an early increase in interest rates. Following the NFP report, the likelihood of a Fed rate hike, which was around 67 percent, has now decreased to approximately 51 percent. Despite these challenges, a 25 basis-point interest rate increase in the US for December is still fully priced in.

This development means that Fed policymakers will likely turn their attention to upcoming key inflation data for further insights.

In my previous month’s update, I noted the movement of the Japanese Yen, which had breached the previously established intervention level by the Bank of Japan (BOJ). Market participants tested the BOJ’s resolve as the dollar surged past 162.50 against the yen before declining.

Although it hasn’t been confirmed, there is speculation that, since verbal intervention has been ineffective, the BOJ may have employed a sudden intervention tactic prior to the NFP data release.

While intervention remains unverified, if it occurred, it would have caught yen sellers off guard.

It seems this tactic may have worked, as the market became cautious about aggressively buying the dollar, leading to some stabilization of the Japanese currency.

Following the dollar’s drop, the yen gained nearly 150 pips. Although there has been no official word on the intervention from other sources, one reliable news agency has described it as an “ambush intervention strategy.”

It appears that the BOJ might be implementing a strategy to enhance its effectiveness by keeping traders uncertain. If this is accurate, the strategy could be effective, at least in the short term.

However, attention should remain on the 162.80-90 range as it now serves as a significant support level for the yen.

It’s also possible that the yen has strengthened against a weak dollar due to the unexpectedly low nonfarm payroll figures. This week is likely to provide clearer trends as traders may further assess the BOJ’s resolve. The important levels to monitor are 159.80 on the downside and 162.90 on the upside.

In the meantime, gold has been gaining strength as buyers consistently stepped in during price dips.

This trend accelerated following the release of disappointing NFP data on Thursday, leading to a rise in prices. On Friday, gold even briefly reached the $4195 mark.

The calm situation in the Middle East and declining oil prices are also contributing to the stabilization of gold prices. However, trading conditions remain highly volatile, with gold fluctuating over a $100 range during the day last week, making it challenging for short-term traders to manage their daily portfolios effectively.

Without any unrest in the Middle East this week, the market is likely to shift its focus to upcoming economic reports. Investors will be keenly observing the ISM Services and PMI release for June, while the FOMC meeting minutes are set to be published on Wednesday. The ISM manufacturing report released last week has already dropped to 53.3 from 54.

Given that the ISM Services index represents a significant portion of the US GDP, a higher reading could rekindle expectations for a Fed rate hike, which might negatively impact gold prices. However, a lower figure could bolster positive sentiment for gold.

Last week, the weakness of the USD allowed European currencies to gain some momentum, and this week, currency traders will be looking at the ECB minutes due on Thursday for clues about interest rate direction.

Following the hike in the deposit rate from 2 percent to 2.25 percent and a recent upward adjustment of the inflation forecast, traders will be attentive to the language used for future interest rate guidance, particularly since European policymakers appeared optimistic during the rate hike announcement. A stronger tone in communication could push the Euro higher.

Meanwhile, the UK economy remains uncertain due to various political and economic challenges.

On a positive note, recently released data indicates that inflationary pressures have eased somewhat and business confidence has improved.

A decline in global fuel prices has also provided some relief, yet costs related to transportation, raw materials, and wages continue to be alarmingly high, suggesting that the Pound Sterling may take longer to stabilize.

While it may see temporary gains, the economic conditions suggest that the overall trend remains downward.

WEEKLY OUTLOOK - July 06-10

GOLD @ $ 4175.50- Gold may see another week of volatility. If gold surpasses the $4250 mark, it could lead to a rise towards $4295. However, I also see potential downside risks. If it drops below the $4102 level, it could fall to $4010 or even $3965.

EURO @ 1.1437- The euro must surpass 1.1498 to achieve gains. However, it’s more likely to maintain its current position. A drop below 1.1335 is necessary for it to reach 1.1280. Otherwise, it is expected to stay within its current range.

GBP @ 1.3352- It is essential to overcome 1.3448, which seems challenging. Later Pound Sterling might decline, but the crucial support level at 1.3280 is unlikely to give way. If it does, the next level to watch is 1.3230.

JPY @ 161.38- A decline below 160.50 is needed to evaluate the important 159.75 levels. A breakthrough could potentially lead to 158.20. At the same time, there is still potential for testing and surpassing the 162 levels, aiming for 162.80. The Bank of Japan may still take action.

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