FX.co ★ XAU/USD: Strong macro data keeps the Fed from pausing interest rate hikes

Last Wednesday, the dollar significantly strengthened, and its DXY index jumped to levels from a month ago, reaching 102.58.

The bullish impulse for the dollar came both from a strong report by the company Automatic Data Processing (ADP), which showed that private sector employment in the U.S. increased by 324,000 in July, well above the forecasted growth of 189,000 and following a growth of 455,000 in the previous month, and from the so-called "flight to safety" of participants in the U.S. stock market after credit rating agency Fitch Ratings downgraded the long-term credit rating of the U.S. from AAA to AA+.

At the same time, favorable employment data in the private sector from ADP, which is considered a precursor to the official employment report by the U.S. Department of Labor, indicated the strength and stability of the American labor market.

In this situation, investors preferred the dollar as a safe-haven asset over gold. Gold prices sharply declined yesterday, partly due to the ongoing rise in yields on U.S. government bonds (today, the yield on 10-year U.S. bonds reached a new 9-month high of 4.169%). Participants in the U.S. stock market increased asset sales in anticipation of further actions from the Federal Reserve aimed at combating high inflation, including further interest rate hikes. In these conditions, investments in the appreciating dollar become more attractive and secure.

Earlier today, during the European trading session, the XAU/USD pair reached a new 3-week low at 1931.00.

Above the support levels of 1926.00 and 1908.00, XAU/USD remains in the zone of medium-term and long-term bullish markets. Therefore, even if the decline in gold prices continues for some time, around the support levels of 1926.00, 1910.00, 1900.00, and 1896.00, one can expect a rebound and a resumption of upward dynamics (from a technical point of view). Our main forecast for the rise in gold prices remains in force, and another break of the psychological level of $2000.00 per ounce may trigger another wave of panic buying of gold.

Today, dollar buyers can get a new argument, and the dollar itself can gain a new bullish impulse if the expected (at 12:30, 13:45, and 14:00 GMT) important macro data from the U.S. also turns out to be positive.

The greatest attention here is perhaps worth paying to the release at 14:00 (GMT) of the July data (from the Institute for Supply Management) on business activity in the U.S. services sector. It is expected that the PMI index declined in July from 53.9 to 53.0. Despite this slight relative decline, the indicator remains above the value of 50, which separates the growth of business activity from its slowdown, still creating prerequisites for further economic growth.

According to a recent report by the U.S. Bureau of Economic Analysis, preliminary data indicated a GDP growth of +2.4% in the 2nd quarter (against a forecast of +1.8% growth after +2.0% growth in the 1st quarter). The GDP data confirmed a reduction in the risks of the national economy slipping into a recession, and the GDP growth may give the Federal Reserve more time to maintain interest rates at high levels, which will continue to exert downward pressure on inflation.

Now we are waiting for the ISM report with data on the state of the service sector of the U.S. economy, which accounts for nearly 80% of the American GDP and about 80% of the working population of the country, and the U.S. Department of Labor report with data on the job market for July.

GDP, labor market, and inflation level data are critical for the Fed in planning credit and monetary policy parameters.

If the official employment data, which will be released on Friday (at 12:30 GMT), also turn out to be strong, Fed leaders will receive an additional argument in favor of a new interest rate hike or, at the very least, maintaining it at high levels.

And this is a negative factor for gold, whose quotes are highly sensitive to changes in the parameters of the credit and monetary policies of the world's major central banks, primarily the Fed.