Gold Price Analysis: XAU/USD drops below $1770 on solid US jobs data, markets focused on Fed

• XAU/USD has dropped under support just above $1770 following a strong ADP report.
• Focus now turns to the Fed announcement, where the bank will unveil its QE taper plans.

Spot gold (XAU/USD) prices have been dropping in recent trade and have recently dropped under a key area of support in the form of last week’s low at just above $1770. As things stand, XAU/USD is trading slightly under $1770 with losses of more than 1.0%. FX and bond markets are not on the move, rather, the DXY not moving much and is just above 94.00, while 10-year nominal and real yields are not moving much in the respective 1.55% and -1.0% areas, so the recent drop is not being driven by cross-asset correlations.

Strong jobs data triggers the drop

The catalyst for the most recent drop appears to have been stronger than expected jobs data from US payroll processing company ADP, whose national employment change estimate for October was released at 1215GMT and showed 571K jobs being added to the economy last month. ADP has a patch record in the post-pandemic era when it comes to accurately predicting the official non-farm payroll (NFP) number released by the US Bureau of Labour Statistics each month. Nonetheless, a stronger-than-expected ADP estimate is usually seen as a good sign that increases the chance the NFP number is going to be strong.

The median estimate for Friday’s NFP number currently stands at 450K, but in wake of the ADP data, some economists and analysts might be inclined to increase their guesses. If the US labour market report on Friday is as strong as hoped, or even stronger, this would support the case for faster policy normalisation by the Fed, most analysts agree. A more hawkish Fed means higher interest rates sooner, which would likely also translate into higher bond yields, which would raise the opportunity cost of non-yielding gold.

Upcoming Fed policy announcement

Speaking of the Fed, the immediate focus for FX, bond and precious metal markets is the Fed upcoming policy announcement at 1800GMT on Wednesday, followed by the usual press conference with Fed Chair Jerome Powell at 1830GMT. The Fed is widely expected to announce its QE tapering plans; purchases are currently running at a pace of $120B per month and this is likely to be reduced at a pace of $15B per month (meaning net purchases reach zero by June 2022). The QE taper announcement will not trigger a market reaction as it is now very much priced in, unless of course the Fed opts for a more aggressive pace of taper of say $20B per month, which would be interpreted by markets hawkishly (negative for gold).

Tapering aside, the most important theme at this Fed meeting is the tone of the statement of Powell’s remarks when it comes to inflation; the Fed has in the past brushed off the current spike in inflation as mostly as a result of transitory factors, but they are under growing pressure to acknowledge that there is a growing risk this is not the case. In recent weeks, Fed members have conceded that pro-inflationary supply chain disruptions may persist longer than expected, labour market indicators are increasingly tight (wage inflation is growing) and there is a risk that consumer and market-based measures of inflation expectations may become de-anchored from the Fed’s 2.0% target as energy costs surge. The Fed is thus going to sound more hawkish on inflation, but whether they will sound hawkish enough to live up to money market pricing which looks for rate hikes as soon as mid-2022 is another question. Any reference to money market pricing by the Fed chair would be of significant interest.