- The US economy added 142,000 jobs compared to forecasts of 165,000.
- Inflation jumped by 0.3%, increasing the likelihood of a smaller Fed rate cut.
- Gold prices fell after the US CPI report.
Gold prices rose on Tuesday and Wednesday before pulling back after the crucial US inflation data. Initially, the bullish move was subdued as most traders preferred to wait on the sideline. At the same time, the US presidential debate on Tuesday favored Kamala, leading to a drop in the dollar. This made gold cheaper for foreign buyers.
All eyes were on the US consumer and producer inflation reports. Before that, gold traders had anticipated the US nonfarm payrolls report. When it came out, it pointed to a gradual Fed rate-cutting cycle, pushing gold lower. Notably, the US economy added 142,000 jobs compared to forecasts of 165,000, showing slower job growth in August. Meanwhile, the unemployment rate fell to 4.2%, easing fears of a recession.
Fed rate cut bets (Source: Bloomberg)
At the same time, it lowered the chances of a 50-bps rate cut, which would have boosted the yellow metal.
However, the decline in gold did not last long, as traders were still optimistic about the first rate cut. Whether it is 25 or 50 bps, the Fed will start lowering borrowing costs this month. Low interest rates support bullion because it makes it more attractive than yielding assets.
Meanwhile, the US presidential debate on Tuesday showed that Kamala Harris was stronger than Trump. As a result, bets on her win increased, while bets on a Trump win fell, boosting gold prices. A Trump win would result in higher interest rates, increasing the opportunity cost of holding the non-yielding metal.
Elsewhere, investors eagerly waited for the US CPI report, which revealed a slightly mixed picture. Economists forecasted the monthly figure to be 0.2%. However, inflation jumped by 0.3%, increasing the likelihood of a smaller cut.
Meanwhile, the annual figure eased from 2.9% to 2.5%, coming closer to the 2% target. The report shows there is no need to implement a large rate cut this month. Therefore, gold might ease slightly as the day progresses. Nevertheless, the upside potential remains since the Fed will likely still cut rates.
Both the employment and inflation figures have shown a steady decline. Therefore, there is no need for investors to panic. At the same time, the Fed can lower borrowing costs gradually.
