Gold still faces downside risks
The anxiety over a recession intensified as the Q1 GDP figures revealed an unexpected contraction in the economy, attributed to a surge in imports that resulted from tariffs coming into effect in April.
However, market sentiment began to shift with the anticipation of crucial economic reports. On Friday, the Non-Farm Payroll (NFP) figures were released, highlighting the addition of 177,000 jobs in April. Although the March NFP was revised downwards, the US labour market continued to show resilience, with both reports surpassing the average monthly gains of 150,000 over the past year, indicating strength in the job market. While wage pressures eased, the unemployment rate remained steady at 4.2%, likely providing reassurance to risk assets that began to recover, alleviating the initial recession fears.
This positive shift was reflected by signs of progress in trade negotiations between the US and China.
China appeared to be more responsive to discussions regarding trade issues following Washington's proposal to discuss 145% tariffs on Chinese imports. However, a crucial point to note is that neither the US nor China has initiated a serious trade dialogue, suggesting that both may be waiting for the other to make the first move.
The stubbornness displayed by these two major global economic powers in addressing trade matters has unsettled the global markets. A sign of this nervousness is the consistent reports of capital outflows from the US for the third week in a row, despite the improving conditions.
The robust US jobs data released on Friday has led to a decrease in expectations for a Federal Reserve rate cut in June, lowering the probability to about 36% from 58%. Additionally, market expectations for a US rate cut have dropped from 100 basis points to nearly 75 basis points.
The Federal Open Market Committee (FOMC) is set to convene on May 7 to decide on interest rates and is anticipated to maintain the current rates. The market sees only a 7% likelihood of a rate cut.
If the Fed opts to keep rates unchanged, attention will shift to the US President's reactions, making the press conference by Fed Chairman crucial for understanding the Fed's strategy.
In Europe, the focus will be on the UK as the Bank of England (BOE) meets on Thursday to determine interest rates. The BOE is expected to be less concerned about the tariff situation compared to the Eurozone due to its lower trading volume with the US. Therefore, policymakers are likely to prioritize economic growth and may reduce interest rates by 25 basis points and may possibly give signal to the investors that any future cuts would be gradual.
For the last couple of updates, I have been discussing the potential for a correction in gold prices. In the past 10 days, after reaching $ 3,500, gold has retraced nearly 7%. In last week's report, gold hit the anticipated target of $ 3,205. Speculation suggests that the recent drop in gold prices may have been triggered by selling pressures in China, which has been absent from the market due to the May labour holiday. Although there is some optimism regarding a possible trade deal, gold still faces downside risks and is likely to remain volatile due to tariff news and geopolitical developments.
One significant risk for gold is that the farther it declines, the higher the probability of a swift rebound, which vouchers for careful monitoring.
This week, the primary focus will be on the Fed meeting and Chairman Powell's remarks. Traders will also be attentive to the ISM Services PMI for May, which is due on Monday, and the weekly jobless claims data set to be released on Thursday.
WEEKLY OUTLOOK - May 5-9
GOLD @ $ 3240— This week, if gold doesn't rise above the $ 3287-95 range, it will continue to face downward pressure. The crucial support level to watch is $ 3168. A break below that would signal a drop to $ 3125.
However, if there is a breakthrough on the upside, gold could reach $ 3335.
EURO @ 1.1296— Key support for the Euro is located near 1.1210. Only a breakdown below this level could lead to a decline towards 1.1160. On the other hand, the Euro needs to rise above 1.1395 to potentially challenge 1.1485.
GBP @ 1.3272— The key downside level to observe is 1.3180, which is expected to remain intact. For the Cable to achieve additional gains, it will need to break above 1.3440 decisively. If it declines l, then watch for 1.3050.
JPY @ 144.95— USD has support at 144.05, and a break below that could trigger a drop to 143.50. Nevertheless, there is still potential for the US Dollar to reach the 146.20-50 range before it starts to decline.
Copyright Business Recorder, 2025
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