Gold Fundamental Outlook: Neutral

• Gold sank after upbeat NFP report increased Fed rate hike bets
• XAU/USD’s next catalyst may come from US inflation figures

Gold prices fell sharply against a stronger US dollar on Friday. The July non-farm payrolls report crossed the wires at 943 thousand, beating the consensus estimate of 870 thousand. It was the most robust month of growth for the US labor market since August 2020.

The unemployment rate also beat estimates, with the closely watched figure shedding 5 basis points to 5.4%, against the consensus view of 5.7%. The better-than-expected figure boosted Fed rate hike bets. The chance for a 25 basis point rate hike increased from 19.6% to 21.9% for the July 2022 FOMC meeting, according to the CME Group’s FedWatch tool.

Bond traders responded aggressively. The benchmark 10-year Treasury note’s yield climbed 5.95% on Friday, the largest one-day percentage change since March. Yields often rise as bond prices drop. The dollar rose along with Treasury rates, which weighed heavily on gold prices.

The broad-based DXY index, which tracks the US dollar against a basket of peer currencies, rose over half a percentage point following the NFP numbers. A stronger US dollar makes it more expensive for foreign investors to hold gold, detracting from the asset’s appeal.

Gold traders will keep their eyes keenly focused on Fed rate hike bets going forward. That said, the upcoming inflation figures out of the United States, via the consumer price index (CPI), will likely be the next high-impact event for rate bets. The Bureau of Labor Statistics (BLS) is slated to release the data for July on Aug. 11.

The core figure – which strips out volatile food and energy prices – is expected to cross the wires at 4.3%, according to a Bloomberg survey. Fed Chair Jerome Powell has made clear that they see the current spike in inflation as transitory. Nonetheless, a hotter-than-expected print may add some upside to rate hike bets. That would likely translate to a stronger US dollar, and thus, weaker gold prices.

All things considered, if the US economy continues to perform well, especially if data continues to beat expectations, gold prices will likely face mounting pressures.

Gold Vs. One-Day Percent Change