Gold: Dip-Buyers Must Wait for $2000 Level Test Before Scooping up

Gold is at risk of giving back more gains at the start of this week, after ending lower on Friday in response to a robust US jobs report.

A light economic calendar for this week argues against a quick US dollar reversal, which may well keep gold in a downward trajectory in the short-term outlook.

There are no real reasons for investors to sell the dollar this early after a strong jobs report that was published on Friday all but ended talks of an early rate cut.

That being said, you would have thought that investors wouldn’t sell the dollar post a hawkish Fed meeting last week, but they did.

So, let’s see if there will be any real commitment from the dollar bulls this time. So far, it looks like there may well be this time around.

The January jobs report showcased broad strength, prompting investors to shift from bonds to the dollar on Friday, a trend that is unlikely to reverse without any major deterioration in US data.

The yield curve reverted to a bearish flattening mode, contradicting the prevailing belief in an early Fed rate cut, with the likelihood of a March trim pushed down to around 20%.

It will be interesting to see whether these initial post-NFP moves will last.

Fundamentally, there is little reason to fade these moves, but there was an interesting reaction that followed the FOMC meeting in mid-week when US bond yields fell even though Chairman Powell downplayed the chances of an early rate cut.

In response, the US dollar weakened as falling yields helped to underpin foreign currencies, and gold.

But those moves more than reversed post-NFP reaction. Based on the price movements observed last week, it appears that the market misinterpreted the situation.

Investors had convinced themselves that interest rates would decrease this year, and consequently, yields should not remain high simply because the Fed sounded somewhat cautious.

To some extent, this perspective is understandable, especially considering we had a couple of recent data misses that supported such a belief.

After all, the market tends to anticipate future developments, and evidently, investors do not perceive a high likelihood of inflation persisting as a significant risk.

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This could be the reason why the US dollar struggled to extend its gains from January. However, with the release of Friday's data, there is now the potential for a new bullish trend for the greenback and a bearish one for gold.

Looking ahead, today’s key data is the ISM services PMI. The data is anticipated to improve to 52.0 from 50.5. A strong report should keep the dollar bulls happy although even a modestly soft report is unlikely to reverse Friday's moves.

All told and given a relatively light calendar week for US data, the renewed strength in USD should keep the dollar bears at bay.

In turn, gold, a dollar-denominated commodity, should remain out of favor, especially as investors continue to favor the racier equity markets with the major US indices hitting fresh highs on Friday.