Gold up and stocks rally ahead of US PCE and ISM manufacturing PMI

In the wake of comments by Federal Reserve Chair Jerome Powell that the central bank would likely slow the pace of future rate hikes in the coming month, the dollar slipped further, and stocks rallied. There was, however, a dampening effect on sentiment due to weak economic data from China. A drop in the yield on the US 2-year note to nearly 3.70% has led it to fall below its 50-day moving average, and the yield on the 10-year note has weakened similarly, falling to 3.60% for the first time since mid-September. As a result, there is now a greater chance than ever of a 50bp hike at the next FOMC meeting, up from 67.5% to well over 78.7%. Stocks in Europe are expected to start the day on a positive note on the back of yesterday's gains after US markets soared following comments from Federal Reserve Chair Jerome Powell.

Powell said the Federal Reserve (Fed) will slow down the rate hike pace from next month, but that borrowing costs will continue to rise until the Fed is certain it has won the war against inflation. In summary, Powell warned investors that the terminal Fed rate will be higher, and will stay there longer. He remarked that the number of rate hikes is more important than every single increase.

EUR/USD domestic headwinds capped the rally

EUR/USD rose 0.1% to 1.0460 this week, not far from its five-month high of 1.0497. However, the euro's gains have been tempered by a 2.8% slump in German retail sales in October, which sets an ominous tone for a fourth quarter in which it is expected that Europe's largest economy will contract to a record low. Earlier this week, Eurozone consumer prices came in lower than expected, possibly indicating that inflation is on hold. This could trigger a lowering of rate hike expectations for the European Central Bank. At the same time, the European currency is likely to closely follow the dynamics of the dollar. This is due to the impact of the energy crisis on the region, and the divergence between the Fed and the ECB. Further, it appears that markets are repricing a potential pivot in the Fed's policy, for the time being, thus driving the pair's price action solely based on market expectations. As speculation of a possible recession in the bloc grows, the euro is likely to face an immediate domestic headwind in the short term.

Events of the day

Several key economic indicators will be monitored on Thursday, including the ISM manufacturing PMI for November. The US schedule will be busy with household income and spending, particularly the PCE price index, deemed to be the Fed's favourite measure of inflation.

The focus tomorrow will be on the nonfarm payrolls report, which is expected to show 200k new jobs, down from 261k the previous month. This will result in an unemployment rate of 3.7%, stable since October.

Gold has $1800 on the horizon

In gold futures markets on Thursday, the open interest shrank for yet another session, this time by around 4.1K contracts based on the advanced prints provided by CME Group. Volume, on the other hand, reversed the previous daily decline and crept up by close to 50.6K contracts.

On Thursday, gold prices rose sharply per troy ounce, continuing the previous session's rally on the back of a weaker dollar which helped boost the price. Although the price rose, shrinking open interest may indicate that upside momentum is about to run out of steam in the very near term. The next target of relevance on the upside is located in the region of $1,800, which is reinforced by the presence of the 200-day simple moving average, which is today sitting at $1,796.