Market update: US dollar surges as Powell takes hawkish stance - examining trading opportunities in EUR/USD, USD/JPY, AUD/USD, and gold

The dollar's surging momentum

The broader US dollar opened the session on a subdued note but saw a strong afternoon rally, primarily fueled by surging yields, following lackluster demand for US government securities at a significant Treasury auction. The greenback's upward surge gained further momentum with the hawkish statements made by Federal Reserve Bank Chair, Jerome Powell during a panel hosted by the IMF.

Powell's hawkish outlook and market uncertainty

In public remarks, the FOMC chief said that policymakers are not confident they have achieved a sufficiently restrictive stance to return inflation to the 2.0% target in a sustained manner. He also indicated that further progress on cooling price pressures is not guaranteed, and stronger growth could warrant higher rates.

When it was all said and done, the DXY index was up nearly 0.4% on the day. Taken together, Powell’s comments suggest that the central bank is not 100% convinced that the hiking cycle is over. This could mean another possible hike next month or in January, especially if financial conditions continue to ease, as has been the case since late October (tech stocks have been on a bullish tear, ignoring today’s performance).

For the time being, expectations will remain in a state of flux, with sentiment shifting with the strength or weakness of data releases. For this reason, it is imperative that traders keep an eye on the economic calendar in the coming days and weeks. That said, one key report worth following is the October consumer price index survey, due out next Tuesday.

Impact on bond yields and currencies

In terms of analysts’ projections, headline CPI is forecast to have risen 0.1% on a seasonally adjusted basis last month, bringing the annual rate down to 3.3% from 3.7% previously. The core gauge, for its part, is seen increasing 0.3% monthly, resulting in a yearly reading of 4.3% - unchanged from September. With the Fed hypersensitive to incoming information and fearful of inflationary risks, any upward deviation of official data from consensus estimates should boost bond yields and strengthen the case for higher interest rates for longer. This scenario would be positive for the greenback, but negative for gold, the euro, the Australian dollar and the yen.

EUR/USD technical analysis

After facing rejection from Fibonacci resistance at 1.0765, EUR/USD has undergone a quick pullback, with the exchange rate now flirting the lower limit of a support band at 1.0650. The bulls must defend this floor at all costs – failure to do so can send the pair reeling, driving prices toward trendline support at 1.0555. On further weakness, the possibility of a retest of the 2023 lows come into view.

In case the market turns and sentiment swings in favor of the bulls, the first technical barrier to watch appears at 1.0765, where the 200-day simple moving average aligns with the 38.2% Fib retracement of the July/October decline. Overcoming this confluence of key levels could reinforce the bullish momentum, paving the way for a move towards 1.0840.

EUR/USD technical chart

USD/JPY technical analysis

USD/JPY pulled back last week, but has reasserted its upward momentum, taking out an important ceiling at 150.90 and charging towards its 2022 and 2023 highs, just shy of the psychological 152.00 mark. With prices on a bullish tear and approaching an important tech zone, traders should exercise caution, as Tokyo may step in any minute to curb speculative activity and prevent further yen depreciation.

In the event of FX intervention by Japanese authorities, USD/JPY could quickly sink below 150.90 and head towards the 149.00 handle. On further weakness, the focus shifts to 147.25, followed by 146.00. If Tokyo stays out of currency markets and allows the exchange to drift above 152.00, a potential rally towards the upper boundary of a medium-term rising channel at 153.40 becomes conceivable.

USD/JPY technical chart

AUD/USD technical analysis

AUD/USD fell for the fourth straight session on Thursday, erasing all gains accumulated following last week’s bullish breakout, which turned out to be a fakeout. After this pullback, the pair has arrived at an important support near 0.6350. The integrity of this area level is vital; a failure to maintain it could result in a drop towards 0.6325. On further weakness, a revisit to this year's lows could be in the cards.

Despite the recent setback for the Australian dollar, the bullish scenario should not be entirely dismissed. That said, if the bulls engineer a comeback and trigger a rebound off current levels, overhead resistance appears around the 0.6400 handle, followed by 0.6460. Successfully overcoming this technical barrier could reignite bullish momentum, opening the door for a rally toward the November highs near 0.6500.

AUD/USD technical chart

Gold technical analysis

Earlier this week, gold reversed lower when the bulls failed to take out a critical ceiling in the $2,010/$2,015 area. However, XAU/USD has started to perk up after this setback, with prices encountering support around the 200-day simple moving average ahead of a modest bounce. If gains pick up pace in the coming trading sessions, initial resistance appears at $1,980, followed by $2,010/$2,015.

Conversely, if sellers return and regain the upper hand in financial markets, the first floor to monitor is positioned at $1,945, which aligns with the 200-day SMA. Although gold might find a foothold in this region during a pullback, a breakdown could prompt a descent towards $1,920. Below this region, the focus transitions to $1,900.

Gold price chart

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