Dollar Soars on Fed’s Hawkish Outlook

19 August 2022, 02:06

Market Focus

US stocks edged higher on Thursday as mixed economic and earnings reports failed to spark a broad conviction trade.  The weekly jobless claims data fell for the first time in three weeks, a sign of strength in demand for labor, while a gauge of manufacturing activity in the Philadelphia area unexpectedly expanded in August. Meanwhile, following an equity rally from June lows, sentiment turned fragile Wednesday after the Fed minutes signaled inflation-busting rate hikes will continue despite a weakening economy. Further clues for policy makers’ view may come at the Fed’s annual symposium in Jackson Hole, Wyoming next week.

The benchmarks S&P500 and Nasdaq 100 advanced after swinging between modest gains and losses on Thursday. Seven out of eleven sectors of the S&P 500 stayed in the positive territory with Energy the best performing among all groups, rising 2.53%. Real Estate underperformed and slid 0.75% for the day as existing-home sales fell for six straight months, indicating the housing market’s rapid decline. The Dow Jones Industrial Average edged up, the Nasdaq 100 rose 0.3%, and the MSCI World index was little changed on Thursday.

Main Pairs Movement

The US dollar surged on Thursday, as Federal Reserve officials spoke of the need for further rate hikes, causing investors to reevaluate the minutes from the U.S. central bank’s July meeting on Wednesday as being more hawkish. The DXY gained bullish momentum during the US trading session and broke through to a month-high level above 107.5 amid a cautious market mood.

GBPUSD dropped 0.98% on Thursday on the back of a strong US dollar across the board. The safe-haven greenback witnessed strong transactions, weighing down Cable during the US trading session. The pair touched nearly a month-low level below 1.193. Meanwhile, EURUSD held lower ground after refreshing its monthly bottom the previous day and falling to a level below 1.008 at the end of day. The pair dropped 0.91% on Thursday.

Gold slid 0.18% for the day in its fourth consecutive day of decline. With a hawkish Fed speech and fears surrounding China’s recession exerting downside pressure, XAUUSD observed fresh traction during the UK session and touched a daily-high level above $1772, but then lost upward momentum and dropped to a level below $1760 marks during the US trading session. WTI and Brent oil surged on Thursday, rising 2.71% and 3.09% respectively.

Technical Analysis

EURUSD (4-Hour Chart)

The EUR/USD pair declined on Thursday surrounded by bearish pressure, dropping to a daily low below 1.012 level at the start of the US session amid a risk-averse market environment. The pair is now trading at 1.0134, posting a 0.42% loss on a daily basis. EUR/USD stays in the negative territory amid renewed US dollar strength, as the better-than-expected US macro data provide some support to the safe-haven greenback and dragged the EUR/USD lower. The US Weekly Initial Jobless Claims declined to 250K and came in lower than the market expectation of 265K, which underpinned the expectations that the Fed would continue to tighten its monetary policy. For the Euro, the Eurozone inflation arrives at 8.9% YoY in July, meeting market’s estimates. But energy supply-related concerns keep being a key factor in headwinds for the shared currency.

On the technical side, the RSI is at 31 as of writing, suggesting that the pair is facing heavy selling pressure as the RSI is approaching the oversold zone. As for the Bollinger Bands, the price has moved out of the lower band so a strong downside trend continuation can be expected. In conclusion, we think the market will be bearish as the pair is testing the 1.0111 support. A break below that level could confirm the bearish bias in the near-term and drag the pair lower toward 1.0062.

Resistance:  1.0188, 1.0246, 1.0287

Support: 1.0111, 1.0062, 0.9991

GBPUSD (4-Hour Chart)

The GBP/USD pair tumbled on Thursday, extending its previous slide and refreshed its daily low below the 1.200 mark heading into the US trading session amid the souring market mood. At the time of writing, Cable stayed in negative territory with a 0.49% loss for the day. The hawkish commentary from Fed’s official helped the safe-haven Dollar to find demand, as San Francisco Fed President Mary Daly reiterated that it was way too early to declare victory on inflation in an interview with CNN on Thursday. She also said that either a 50 basis points or a 75 basis points hike would be appropriate. For the British pound, the currency remained under pressure despite the hotter-than-expected UK CPI data, as investors now speculate that an economic downturn might force the BoE to adopt a gradual approach to raising interest rates.

On the technical side, the RSI is at 30, suggesting the pair’s bearish outlook in the near-term as the RSI is reaching the oversold zone. As for the Bollinger Bands, the price witnessed heavy selling pressure and dropped below the lower band, therefore the downside traction should persist. In conclusion, we think the market will be bearish as the pair is heading to test the 1.1940 support. Additional losses toward 1.1897 could be witnessed if the pair breaks below the aforementioned support.

Resistance: 1.2071, 1.2119, 1.2188

Support: 1.1940, 1.1897, 1.1830

XAUUSD (4-Hour Chart)

Gold gained some positive traction on Thursday, but immediately declined back to $1,760 level. Stronger US dollar is still weighing on the Gold price.

The dollar surged to a fresh monthly high on firm expectations that the Federal Reserve will continue to tighten monetary policy. Although the FOMC minutes released on Wednesday did not hint at a specific pace of future rate hikes, still showing that policymakers remained committed to raising rates to tame inflation, which still supported bullish sentiment around the US dollar.

Meanwhile, the RSI is at 33 – still in bearish mode but not reaching the oversold zone. As for the Bollinger Bands, gold price keeps moving between moving average and lower bound, forming a clear downward tunnel. The price seems to test support above $1,757 level. If price closes with a negative price action below $1,757 level on the 4H chart, it might head to test the next support level at $1,714 level.

In conclusion, the fundamental background suggests that the most likely path for gold is to the downside. Even from a technical perspective, the recent positive moves are still seen as selling opportunities by investors, gold price therefore declined downward on the 4H Chart and hardly gained positive traction. We think the market is still bearish as fundamental background and technical analysis both support downward traction. Now, investors are looking forward to the US economic data, seeking broader risk sentiment which could provide clear direction and fresh momentum for gold prices.

Resistance: 1783, 1803, 1857

Support: 1757, 1714, 1685