Gold to Extend Declines a Powell Signals More Rate Hikes

Talking Points: 

• Gold may extend its recent declines as Fed Chair Jerome Powell signals interest rates may be heading even higher.  

• An extremely tight labour market could result in the Fed Funds rate climbing to as high as 5.4% in the coming months.  

Gold prices have tumbled lower over the last four trading sessions, sliding as much as 5% after a bumper non-farm payrolls report signalled that further hikes to the Fed Funds rate could be at hand. The US labour market added a whopping 517,000 roles in January, the most since July of 2022 and easily topping consensus estimates of a 185,000 job print. Indeed, the most recent print far surpasses the average monthly gain of 401,000 seen throughout 2022. This wave of hiring has resulted in the unemployment rate declining to 3.4%, the lowest level in over 50 years and far lower than market expectations of a 3.6% print. The tightness seen in the local labour market appears to be of a concern to officials at the Federal Reserve, who fear that record low unemployment could catalyse a wage-price spiral and keep upside pressure on inflation.  

US Non-Farm Payrolls 

Indeed, Chairman of the US central bank, Jerome Powell, stated that further rate increases may be necessary in response to a labour market that is “extraordinarily strong”. These comments reinforce what was heard from several of Powell’s colleagues in the last week, with Neel Kashkari – President of the Minneapolis Federal Reserve – signalling that the Fed Funds rate will peak at 5.4%. This equates to three more 25-basis point hikes over the coming months and is bad news for gold bulls given Kashkari is one of the Fed’s more dovish members. Gold generally exhibits a strong inverse relationship to real rates which rise when further increases to the Fed’s benchmark rate is likely. With that in mind, more downside could be on the cards for Bullion, especially given key support at $1,900/oz has given way.  

Gold Inverse Relationship to US 5-Year Real Rates 

Gold Price Daily Chart – Ascending Channel Breach to Encourage Sellers 

From a technical perspective, the outlook for gold appears structurally bearish as prices collapse back below key support at $1,900 and dive below the lower bound of the Ascending Channel that has guided price higher since late November.  

The formation of two wide ranging Bearish candles signals a distinct change in momentum and suggests that the path of least resistance is lower.  

Remaining capped by resistance at the 23.6% Fibonacci level (1873) may pave the way for sellers to drive price towards psychological support at $1,850. Breaching that brings the 38.2% Fibonacci level into the fray. 

However, if buyers can regain a foothold above $1,875, a recovery rally to retest the $1,900 mark could be on the cards.  

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