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Summary: On Friday, gold prices effectively took advantage of the weakness in the U.S. dollar to show solid upside for the second consecutive day. Nonetheless, the technical indicators do not support expectations for further gains for the asset, and it is expected to maintain range-bound volatility after today's non-farm payrolls report.

Fundamentals

This Friday, the highly anticipated U.S. jobs report for May will be released to the market. The market is currently expecting the U.S. economy to create 190,000 jobs in May, compared to 253,000 jobs in the previous month. The unemployment rate is expected to come in at 3.5%, up from 3.4% in April.

In addition to employment and unemployment data, average hourly earnings will continue to capture the market's attention as it touches a sensitive nerve at the Fed, which in turn will affect the Fed's interest rate outlook. The market currently expects average hourly earnings to grow at the same pace as in April, up 4.4% year-on-year in May.

Notably, data released Thursday by Automatic Data Processing (ADP) showed that U.S. private sector employment rose by 278,000 in May. The figure follows a 291,000 increase recorded in April and significantly exceeded market expectations of 170,000. In addition, the employment index of the ISM manufacturing PMI rose from 50.2 to 51.4 in May, indicating an increase in manufacturing employment.

In terms of the market, U.S. non-farm payrolls may add 190,000 in May, which represents a deceleration in the average trend over the last three months and is consistent with the weakness in job openings so far this year. The unemployment rate may rise to 3.5%, while wage growth may slow but remain high at 0.4%. Our view on employment and payrolls is more optimistic than the market consensus, which could push the U.S. dollar and bond yields higher. As a result, the Fed's hoped-for significant labor market weakness will not materialize.

On the other hand, this also implies significant uncertainty in the inflation outlook and the future trajectory of the Fed and the U.S. dollar. Therefore, in the long run, we are skeptical that the U.S. dollar rally can be sustained.

Admittedly, the jobs data is not expected to be particularly weak, but the Fed's communication this week implied that a much stronger report would be needed to prompt another rate hike this month, and that a report in line with expectations could "remove the pricing on a lingering rate hike this month".

Traders lowered their bets on further Fed tightening after a series of data showed some progress in keeping inflation in check. Gold prices held steady on Friday and are on track for their best one-week performance since early April after accumulating about 1.8% gains so far this week. Investors are now watching the U.S. non-farm payrolls data due later Friday, which could shake expectations that the Fed will pause to raise interest rates in June.

Technical Analysis

Gold prices are enjoying some weak U.S. economic data that has reduced the likelihood of a Fed rate hike. Factory activity has declined for the seventh consecutive month, and prices paid have fallen sharply, indicating a sluggish economic growth outlook that should take into account the labor market. If the U.S. jobs report fails to make a strong impression, it could be what pushes gold prices back above $2,000.

However, we believe that the technical graphs have clearly suggested that the sharp pull-up from the bottom at $1,932 is nearing its end, as the "wave structure" of the downtrend is limiting gold prices from moving much higher. Conversely, a breakout would indicate a failed setup.

Gold has experienced a significant surge since early March, breaking through several key technical levels and reaching a historic high near $2,079 in early May. Since then, gold prices have been in a steady downward trend, forming a bearish "wave structure".

If the correction continues, bears could again challenge the March support level of $1,933. If that level is lost again, bears could target below $1,900.

Alternatively, if the bulls regain the upper hand, as we described above, it would mean a failed setup, with a psychological barrier at $2,000.

Overall, while there are signs of a range-bottom formation for gold, the intact downward "wave structure" remains as long as the $2,000 level is not broken. We expect gold prices to continue range-bound volatility during the "non-farm situation". In terms of trading strategy, it is recommended to go short at highs.

Trading Recommendations

Trading Direction: Short

Entry Price: 1980

Target Price: 1940

Stop Loss: 2005

Valid Until: 2022-06-16 23:55:00

Support: 1964, 1946, 1941

Resistance: 1985, 1993, 1999