Gold prices have dropped for two days in a row. This decline is due to a shift toward riskier investments and less demand for safe-haven assets. The XAU/USD is currently around $3,363, down from earlier highs close to $3,440, as hopes for a trade deal between the EU and the US develop. Recent economic data from the US shows that the labor market is strong. Weekly Initial Jobless Claims are at 217,000, which is lower than the predicted 227,000. Continuing Claims are slightly below expectations at 1.955 million. This data suggests that the Federal Reserve may keep interest rates higher for longer, which impacts US Treasury yields and strengthens the US Dollar.

Sector Performance Overview

The S&P Global flash Purchasing Managers’ Index (PMI) for July reveals mixed results. The Manufacturing PMI is at 49.5, indicating contraction, while the Services PMI has risen to 55.2. The Composite PMI also increased to 54.6, showing growth in the services sector. There’s a 60% probability of a rate cut in September, according to the CME FedWatch Tool, as the market expects a stable global trade environment. Gold faces resistance at $3,372, with crucial support levels at $3,338 and possibly $3,292 and $3,228 if prices continue to drop. The Relative Strength Index is at 52, suggesting neutral momentum as we await important macroeconomic data. Gold’s recent drop from highs near $2,360 reflects strong US economic data, creating a challenging environment for traders. The strength in the services sector implies that the Federal Reserve might delay rate cuts. The main focus will be on how this data will influence Treasury yields, since rising yields often put pressure on assets that don’t provide returns.

Strong Labor Market

The latest initial jobless claims, at 238,000 for the week ending July 20th, confirm a strong labor market that supports a cautious monetary policy. Federal Reserve Chair Jerome Powell has stressed a data-based approach, meaning the labor market’s strength lessens the need for immediate easing. However, the manufacturing sector is showing weakness, creating mixed signals that may lead to market fluctuations. Even with the strong data, the CME FedWatch Tool shows nearly a 66% chance of a rate cut at the September meeting. This difference between market expectations and recent economic reports creates notable tension. When the Fed pivoted to rate cuts in mid-2019, gold rose over 20% in the following six months, which is why many anticipate a similar outcome. Given the uncertainty, utilizing options may be the best strategy for derivative traders in the upcoming weeks. Buying straddles or strangles allows traders to benefit from significant price changes in either direction—whether it’s a price increase if Powell signals a dovish shift or a decrease if economic strength continues. This strategy effectively bets on volatility, which is likely to increase as major macroeconomic data is released. Traders holding long positions should think about buying put options for protection, especially as gold approaches the key support level around $2,320. If it breaks below this level, it could quickly drop toward the next major support at $2,300. Alternatively, call options can be a way to take advantage of a breakout above resistance near $2,360, providing a cost-effective method to capture potential gains. Create your live VT Markets account and start trading now.

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