XAU/USD Analysis

The blockbuster US jobs report at the beginning of February, revealed that unemployment dropped further to 3.4% and the lowest since 1969. This led to a repricing of expectations around the terminal rate, with markets embracing the Fed’s projected policy path.

This week’s consumer and factory inflation data came in hotter than expected, while weekly jobless claims dropped. Furthermore, we saw another round of hawkish Fed commentary yesterday, such as the one from Ms Mester (non-voter), who reiterated her belief that the Fed needs to raise rates “above 5 percent and hold it there for some time”, while bringing the 50 bps hikes back into the discourse.

These developments boost the USDOLLAR, since they reinforce the now more aggressive market pricing, with CME’s FedWatch Tool assigning the highest probability to a terminal rate of 5.5%, suggesting another 75 basis points worth of hikes.

In our previous analysis, we had talked of the key 38.2% Fibonacci support. XAU/USD extends its losses today and breaches this level, which exposes it to 1,800-1,796, but it may be early to talk for a bigger slump past 1,765.

Despite the breach of this critical level, the downside offers quite a few supports that can contain the drop and provide XAU/USD the opportunity to rebound. Daily closes above the EMA200 (at around 1,870) would shift bias on the upside, but a strong catalyst would be required for that.

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