Market update: US dollar shines bright on strong data; setups on gold, EUR/USD, USD/JPY

The US dollar, as measured by the DXY index, extended its recovery, reaching its strongest level in more than a month at one point in Wednesday’s trading session, supported by the solid jump in US government bond yields, with the 10-year note pushing past its 200-day simple moving average and settling above 4.10%.

Yields accelerated higher following strong December US retail sales, which surprised on the upside at 0.6% m-o-m versus the 0.4% expected, a clear indication that the consumer maintains generous spending habits and remains in good health. In this environment, the likelihood of recession is very low.

US dollar index vs US yields

With the US economy holding up remarkably well and experiencing above-target inflation, the Fed will be reluctant to start lowering borrowing costs prematurely or to slash rates too aggressively, as such a scenario could complicate the path to price stability.

Markets are slowly adjusting to the idea that the US central bank may not pull the trigger too soon in terms of policy easing. To provide context, earlier this year, traders assigned an 80% probability to the first cut arriving in March, but the likelihood of this occurrence has since dwindled to around 50%.

The hawkish repricing of the Fed's path has caused an upward shift in the Treasury curve, as seen in the chart below, reinforcing the greenback’s recovery in the process. This move may have gas to run a bit higher so it would not be surprising to see additional gains for the US dollar in the near term.

US treasury curve shifts upwards

Gold price technical analysis

Gold extended its retracement on Wednesday, breaking and closing below its 50-day simple moving average – a bearish development for the precious metal. If losses intensify in the coming days, initial support lies at $1,990, followed by $1,975. On further weakness, the focus shifts to the 200-day SMA.

Conversely, if buyers regain the upper hand and trigger a turnaround, initial resistance emerges at $2,010 and $2,045-$2,050 thereafter. Taking out this ceiling could prove difficult, but a decisive breakout could pave the way for a rally toward the late December highs located around $2,085.

Gold price daily chart

EUR/USD technical analysis

EUR/USD was subdued, but ended the session above its worst levels on Wednesday, after bouncing off its 200-day simple moving average. If prices manage to hold above this indicator, buyers could trigger a move towards 1.0930. Continued gains from this point onward could expose resistance at 1.1020.

On the other hand, if sellers retain control of the market and push the pair below the 200-day SMA, currently positioned at 1.0840, bearish momentum could gather pace, setting the stage for a pullback towards 1.0770. If weakness persists, a move towards trendline support at 1.0700 could follow.

EUR/USD daily chart

USD/JPY technical analysis

USD/JPY soared past its 100-day SMA on Wednesday, reaching its best level since late November. With sentiment around the yen deteriorating, USD/JPY could soon defy resistance at 149.00. Bulls must protect this ceiling at all costs; failure to do so could lead to a retest of the psychological 150.00 threshold.

On the flip side, if sellers return and push prices lower, the first line of defense against a bearish assault is situated at 147.25, followed by 146.00. The bears are likely to have a hard time driving the pair below this technical zone, but if a breakdown takes place, a rapid decline towards 144.65 could ensue.

USD/JPY daily chart

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