Gold trader - A tactical gold play into defining event risk

Chris Weston
Head of Research
1 Mar 2023
Gold and silver have come up on the radar and both could be a tactical play as we eye a data storm brewing over the next two weeks.

One could argue that it was month-end flow, but the failure of the EUR and GER40 to be overly influenced by the above consensus French and Spanish CPI data suggests the market is becoming harder to shock by inflation reads. After the moves higher in Developed Market bond yields, as rate expectations re-price higher, one could argue a lot is in the price and the risk-reward in shifting – the gold market will be watching this closely.

While there are several data points still to be concerned with in the near term, the two clear marquee events which market participants may start to position for are US non-farm payrolls (NFP - 10 March) and US CPI (14 March). Fed chair Jay Powell speaks next week, and that could spark some market volatility, but trading a speech is more problematic, as we’re fighting algo’s who are programmed to rapidly react to words.

Importantly, the market has been a far big buyer of forward volatility into NFP and CPI and implying far higher intraday moves than any other date in the lead-up to the 22 March FOMC meeting. The market will tweak positioning into these defining events.

Early estimates on the key US data

Looking at the early estimates from analysts, we see the consensus expectations for NFP at 215k jobs, with hourly earnings expected to be unchanged at 0.3% - Consider that the 6-month average is 348k jobs, so we could loosely argue that 215k jobs would represent some cooling of the labour market – the real fate of the bond yields, the USD and gold would then fall on the outcome of the hourly earnings data.

The early estimates for US CPI are trickling in – granted, how others are modelling the outcome when we see their calls later next week. At this stage, we see expectations for headline US CPI between 6% and 5.5%, a decent fall from the 6.4% that we saw in January. Core CPI is expected to fall 20bp to 5.4%. With gold so heavily inversely correlated to both nominal and real US bond yields, I question if the market looks to pair back on their rates exposure into this data – a factor which could boost the gold price.

As we look ahead at these key event risks, the technicals on gold and silver have come onto the radar. As the month of Feb closed off, XAUUSD narrowly missed printing a bearish outside monthly reversal – take the timeframe into the daily, however, and we’ve seen a daily bullish reversal, with price trading below the prior bars low, but ultimately closing above the prior bars high.

Is this a sign of better demand and the sellers failing to push price to $1800? Perhaps - but its early and the price action needs work to really convince - adopting a more momentum approach, I would be placing buy stop orders above Tuesday's high of 1831.15 and positioning for price to keep pushing higher through potential supply.

It may be that we see price rollover and re-test Tuesday's lows, so by waiting for momentum to build and position for a body in motion to stay in motion. A break here would likely coincide with a 3 & 8-EMA bullish crossover.

As with any momentum and trend strategy we get many false breaks and the strike ratio can be far lower than say mean reversion, so it’s important to cut losses early and extract as much out of the trade as possible – win/loss rates mean little for these strategies, where the focus is all about the reward to risk.

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