🟡Gold takes a breath, because of oil, not NFP

Gold prices are trying to rebound slightly ahead of today's publication of the key US non-farm payrolls (NFP) report. Although investors traditionally remain cautious ahead of official US data, the main driving force behind today's improvement in sentiment in the precious metals market is the fall in prices in the crude oil market.

Pressure on oil prices: Proposed release of reserves

A key factor weakening oil and fuel prices is France's proposal for a coordinated release by European countries and International Energy Agency (IEA) members of a total of 100 million barrels of crude oil and fuels. The plan involves supplying 50 million barrels of diesel by European nations and 50 million barrels of crude oil by other IEA member countries to the market.

This initiative is a direct response to growing pressure from Washington. The US administration is struggling with high fuel prices on the domestic market, which hit Americans' cost of living ahead of the upcoming midterm elections. The specter of possible US restrictions on diesel exports prompted European allies to seek market alternatives, which translated into an immediate drop in inflationary pressure from the energy market.

Macrolandscape before NFP: Labor market in slowdown mode

A fall in energy commodity prices could lower inflation expectations over a longer perspective, creating a more favorable environment for precious metals right before the release of the September NFP report. It is worth noting, however, that bond yields in the US are currently extremely overheated. As for the NFP, market expectations point to a clear cooling in the pace of job creation in the US compared to the last strong report.

• Employment forecasts: Bloomberg Economics estimates assume non-farm payroll growth of just 55k (compared to 162k in August and a market consensus of 88k).
• Market consensus: Analysts' forecasts point to a reading of 90k, consistent with the ADP report publication.
• Unemployment rate: It is expected to rise slightly to 4.17% (versus 4.14% previously).

The US labor market is moving into a mode of distinctly lower new job creation. If fuel prices were to start falling permanently from current levels, hawkish Fed expectations could be reduced.

Outlook for gold

The fall in crude oil prices takes away part of the risk of sustained, high inflation from the market, translating into a drop in 10-year bond yields to 5.2% and giving gold room for an upward rebound. However, the ultimate direction for the precious metal will be determined by the NFP reading itself. If the data confirms a deeper slowdown in the US labor market, dovish expectations toward the Fed will strengthen, which could provide an impetus for a more sustained upward move. An unexpectedly strong report remains the main risk that could quickly trigger profit-taking.