The U.S. dollar's momentum and new economic data may slow gold's rally next week, according to analysts.
Gold has been rallying over the past few weeks due to the volatility in the U.S. dollar and a significant drop in bond yields. It is on track to end the week two percent higher, with the June contract last traded at around $2,023.70.
Analysts earlier predicted that gold prices could hit new highs of over $2,000 an ounce by next week. However, a potential dollar rally may make it challenging for gold to achieve that record price and prompt investors to make profits on their bullish gold investments.
Darin Newsom, a senior market analyst at market quote provider Barchart, explained that the U.S. dollar was establishing a brief uptrend on its daily chart. He pointed out that at the same time, June gold contracts were a "bit top heavy." Newsom added that a market situation like this typically ends with a weakening dollar and stronger gold.
In the coming days, the U.S. government will publish a series of economic reports which will further determine the movement of the U.S. dollar and gold futures. This Friday, the Department of Labor will release the non-farm payroll report. Economists estimated that the U.S. had added 288,000 jobs last month, stressing that a better-than-expected payroll report will result in a bull for the dollar and impact the gold market negatively.
Commodity analysts at financial services firm TD Securities published a note explaining that a "strong" report could raise Fed expectations and cause commodity trading advisors (CTAs) to reduce their positions if gold prices did not hold above $2,026 an ounce. Meanwhile, a weak payroll report can motivate investors to add to their long positions.
The U.S. job market has remained "surprisingly" resilient despite the Fed's monetary tightening campaign that started in March last year. The unemployment rate even fell to the lowest level in decades last January. However, economists noted there were signs that the job market had started to weaken.
The private payrolls report for March showed lower-than-anticipated job additions at 145,000. The financial sector lost 56,000 jobs, while the professional and business services sector saw a 46,000 decline.
ActivTrades senior analyst Ricardo Evangelista predicted that gold price could break through its previous record of $2,069 if the upcoming economic data supported the outlook of an economic slowdown. OANDA market analyst Craig Erlam shared a similar opinion about the new data pushing gold to rally.
"Any disappointing data or even numbers in line with expectations and we will see gold make a run to its record highs," Erlam said.
Economic data to influence Fed's policy
Analysts said the upcoming economic data would influence the Fed's decision in its next rate-setting meeting. Signs of a slowdown in the U.S. economy can further motivate the Fed to pause interest rate hikes. The Fed is already cautious about its monetary tightening policy due to banking stresses last month, as noted by analysts.
Market analytics CME FedWatch Tool showed a 50/50 probability that the Fed would maintain the interest rate at the current range of 4.75 to 5.00 percent. The market also expects the Fed to cut interest rates by 85 basis points by the end of the year.
According to analysts, a 25-basis-point increase by the central bank in May will create a headwind for gold. However, it will not be a "game changer" for the commodity, and investors only need to wait a little longer before gold hits its record highs again.
Walsh Trading's co-director of commercial hedging, Sean Lusk, said this was due to the solid support in the gold market. Lusk said global investors had started diversifying their portfolios into precious metals due to major economic uncertainties.