Spot gold rallies are lackluster, and job market hindsight could mislead the Federal Reserve

On Monday (June 12), spot gold prices rose on the weakness of the US dollar, but the downward path of the US dollar appeared to be buffered. Gold prices did not rise strongly, and investors were cautious ahead of the release of US inflation data and the Federal Reserve's interest rate decision. Signs of weakness in the US job market are becoming more obvious, providing more evidence for the Federal Reserve to end tightening. The job market is often the last to know when a recession is coming.

Beijing time 20:20, spot gold rose 0.20% to $1964.39/ounce; COMEX gold futures main contract rose 0.09% to $1978.9/ounce; the dollar index fell 0.10% to 103.432, the dollar index hit a new low since May 23 to 103.241.

US inflation data for May will be released on Tuesday (June 13), when the Federal Reserve begins a two-day policy meeting. Preliminary estimates suggest that headline inflation in the United States will drop sharply to 4.1% in May from 4.9% in April. However, the annual rate of core inflation in May remains stubborn, expected to decline by only 0.2 percentage points to 5.3%, still well above the Federal Reserve's 2% target.

According to the CME's "Fed Watch" tool, traders see a 77% chance that the Fed will maintain an overnight base rate in the 5.00% -5.25% range this week, but a 66% chance of a resumption of interest rate hikes in July. That is, keeping rates on hold in June is just a temporary move by the Federal Reserve, not an end to the tightening cycle.

Analysts at ANZ said that the US core CPI data for May is expected to weaken due to weak energy costs, but after all, the data will be released in time for the Federal Reserve meeting, which adds to market uncertainty. An unexpected strengthening in the data could force the FOMC to continue to raise interest rates.

Analysts at ANZ added: "Initial jobless claims (261,000) jumped in the first week of June to their highest level since September 2021, and the unemployment rate rose 0.3 percentage points to 3.7 per cent in May, raising the question of whether the labour market has started to weaken. But we think the Fed needs to see a period of sustained labour market weakness to be confident that its policies are working."

Michelle Gillard, head of US operations at NatWest Markets, told CNBC last week: "We think the Fed will eventually skip this month but will be ready for [renewed] action in July."

fxtmSenior research analyst Lukman Otunuga said:"Gold is likely to show sensitivity to the upcoming US CPI report. If the Fed takes a hawkish stance, gold could weaken even if it pauses rate hikes; unexpected rate hikes could trigger a massive sell-off. While markets expect the Fed to pause rate hikes this week, unexpected rate hikes by the Bank of Canada and the Reserve Bank of Australia last week rattled investors."

Is the Fed's fight against inflation over?

The Bank of Canada and the Reserve Bank of Australia unexpectedly raised interest rates last week, suggesting the global fight against inflation is not over yet, although Federal Reserve Chairperson Jerome Powell previously said he was unsure of further rate hikes as tighter lending conditions by U.S. commercial banks are stemming inflationary pressures.

But May's data provided more support for the Fed to keep rates steady in the second half of the year. Not only did unemployment rise sharply and wage growth fall, but other economic activity also performed poorly, with manufacturing activity continuing to contract and services barely expanding.

As the dollar has weakened, gold prices have started to rebound from strong support areas and are already beginning to show signs of this expected behavior. Historically, gold has been a safe haven for investors during times of economic uncertainty, including periods of dollar weakness. As investors anticipate possible dollar weakness, gold is starting to become increasingly attractive as an investment option.

Job market hindsight

The increase in unemployment eases pressure on the Federal Reserve to continue raising interest rates. With fewer jobs available, the central bank has less incentive to raise interest rates to control inflation, leading to lower interest rate expectations. As those expectations soften, it leads to a relatively weak dollar.

Nick Bunker, head of economic research at Indeed Hiring Lab, said all the recent data points were broadly consistent with the soft landing assumption, "the overall picture is that the labour market is cooling in a sustainable way, with plenty and moderate signs of cooling but no red flags".

Wharton School professor Jeremy Siegel recently said that while the Federal Reserve has expressed a strong commitment to fighting inflation, the central bank's dual mandate is to achieve its target inflation rate and maximize employment. Not only did the latest jobless claims soar, but the Conference Board's latest Consumer Confidence Index showed that consumers' assessments of current employment conditions experienced the "worst deterioration" in May. Overall, the latest data on the labor market support the Fed's goal of a soft landing for the economy.

But there's an old Wall Street saying that the job market always knows when a recession is coming last. Siegel added: "If we get a negative jobs report next month, the next two months, it's going to make headlines, and it's going to be the first time since the COVID-19 pandemic. And then people will say, 'Oh, can I be sure I'm going to get another job?' That's going to affect votes, and I think it's going to put pressure on the Fed on the other side, and then they'll start saying, well, maybe the inflation situation will get better."

Matt Simpson, senior market analyst at City Index, said:"... Gold prices don't seem in a hurry to break out of the $1935-1985 range. If the Fed message is not as strong as expected, gold prices could rise towards the $1985- $2000 area."

Spot gold remains concerned about support near $1985

On the daily chart, if the price of gold falls below the May 30 low of $1932, a new downward space will be opened, and the lower support will look at $1926, which is the 38.2% Fibonacci retracement of the downward C wave that started from $1983. On the contrary, if the price of gold starts to rise from $1939, the hourly chart shows that the price of gold may rise above the 61.8% target of $1971 and further touch the 76.4% target of $1979. However, the price of gold must rise above the neckline of $1985 to confirm the start of the rally.