Can Gold Extend Its Rally as NFP Looms?

Gold has risen to a seven-week high, gaining for a fourth straight session, helped by a softer U.S. dollar, lower Treasury yields and growing hopes that the Strait of Hormuz could reopen.

Gold is up 0.5%, trading around 4,270, having posted its largest daily gain since February in the previous session. The 3.7% move higher came amid rising optimism that a deal between the U.S, Oman and Iran to reopen the Strait of Hormuz is close to being agreed.

As a result, oil prices have fallen more than 10% this week, reducing inflationary concerns and prompting the market to rein in Fed rate hike expectations.

According to the CME FedWatch, the market is now pricing in just a 55% probability that the Fed will hike rates in September. A less hawkish Fed is a tailwind for U.S. dollar-denominated, non-yielding gold.

What to expect from Friday’s NFP report

Attention is now turning to the U.S. Non-Farm Payroll report, due to be released on Friday. Expectations are for the U.S. economy to have added 80,000 jobs in July, after 57,000 jobs were added in June. The unemployment rate is expected to rise from 4.2% to 4.3%.

The data comes after ADP payrolls were weaker than expected, rising by 44,000 jobs in July and marking the slowest private payroll growth since January. Separately, the ISM Services PMI employment component fell from 51.2 to 47.1, while the Manufacturing PMI employment component improved from 49.7 to 52.8. Job openings were also weaker than expected.

Given these lead indicators, there is potential for Friday's report to come in modestly softer than expected.

If non-farm payrolls are significantly weaker than expected and the unemployment rate rises by more than forecast, investors could scale back Fed rate hike expectations further. This could pull Treasury yields and the U.S. dollar lower, offering further support to gold.

On the other hand, stronger-than-expected job and wage growth could strengthen the case for the Fed to raise interest rates. Treasury yields and the U.S. dollar could find support, while gold could come under pressure.

However, the Strait of Hormuz remains another important part of the outlook. If the U.S. and Iran reach a deal and oil prices fall further, easing inflationary pressures could offset some of the impact of stronger jobs data and continue to support gold.

Gold tests 200 EMA resistance  

Gold has recovered from the yearly low at 3,940, breaking above the multi-month falling trendline and the 50 EMA to test resistance at the 200 EMA around 4,285.

Supported by the RSI above 50, buyers will look to break above this key resistance to bring 4,500 into focus and strengthen the broader outlook.

Failure to reclaim the 200 EMA could see gold retest the 50 EMA at 4,190. A break below this level would open the door to the psychological 4,000 mark, ahead of the 3,940 low. A move below 3,940 would create a lower low, bringing 3,800 into focus.