Gold prices are showing signs of recovery after falling 3.4% last week, with XAU/USD hovering around $4,150 early this week. Weak US employment data has shifted expectations regarding Fed rates, giving gold room to rebound.
Weak NFP Data Changes the Fed Game
September’s Non-Farm Payrolls (NFP) data showed an increase of only 29,000 jobs—far below expectations—while the unemployment rate rose to 4.2%.
The impact is clear. The probability of the Fed raising rates in October now stands at around 18%, down from approximately 70% just a week earlier.
This is a positive development for XAU/USD because gold does not yield interest. When interest rate expectations drop, the opportunity cost of holding gold decreases.
But Don't Rush to Buy Just Yet
Even though a Fed rate hike in October is now less likely, gold still faces a major hurdle.
Treasury yields remain high.
The US 10-year yield is hovering around 5.2%, while the bond market remains plagued by concerns over inflation, government spending, and massive financing needs.
A persistently strong USD also caps gold's gains, as the metal becomes more expensive for holders of other currencies.
So, while weak NFP data offers a reprieve for gold bulls, it is not yet enough to confirm a trend reversal.
Oil Could Be the New Catalyst
The next risk factor stems from the oil market and geopolitics.
Brent crude remains above $100 following an escalation of conflict in the Middle East. Developments in Yemen and operations targeting Houthi-controlled areas are heightening concerns regarding energy supplies and inflation.
This creates an interesting scenario for gold.
If oil prices continue to rise, inflation could climb, pressuring the Fed to maintain a hawkish stance. However, if the conflict escalates, demand for gold as a safe-haven asset could rise.
This means geopolitics can act as a supporting factor for gold, even while simultaneously exerting pressure through inflation.
XAU/USD is currently hovering around $4,150, following a significant drop last week.
Recent price data shows gold holding above the $4,100 level, a zone it tested multiple times in late September.
As long as the price remains above that level, there is still room for a recovery.
However, if selling pressure returns and the $4,100 level fails to hold, traders should be wary of a continued decline following September's sharp drop.
**Fed Minutes: The Next Catalyst**
Attention now shifts to the Fed Minutes due on Wednesday.
This document is crucial as traders seek to determine whether Fed officials are truly becoming more comfortable with pausing rate hikes or if they still see a need to tighten monetary policy.
If the Fed's tone is more dovish, gold could gain additional support from a decline in the USD and Treasury yields.
If the Fed continues to warn about inflation, XAU/USD could face renewed downward pressure.
**What Should XAU/USD Traders Watch?**
Bullish for gold:
Weak NFP → Fed rate hike expectations fall → yields drop → USD weakens → gold gains support.
Bearish for gold:
Oil prices rise → inflation increases → yields remain high → USD strengthens → gold faces renewed pressure.
**Key catalysts this week:**
Fed Minutes, Treasury yields, USD, oil prices, and developments in the Middle East conflict.
**Conclusion**
Gold bulls have finally found some breathing room after the NFP report reduced the likelihood of a Fed rate hike in October.
However, do not assume the decline in gold prices is over.
The market is currently caught in a tug-of-war between an increasingly dovish Fed and the renewed threat of energy-driven inflation. If yields begin to fall alongside the USD, XAU/USD could potentially gain stronger recovery momentum.
Conversely, if oil prices continue to surge and yields approach their highs again, gold could face renewed selling pressure.
The biggest question now is no longer "Will the Fed raise rates or not?" but rather, "Will yields and the USD finally give gold room to rally?"
