USD still on market hawkish pressure

December 7, 2022

U.S. equities hit their peak and kept falling after the speech of Fed Chair Powell on 12/1. There was a rebound on 12/2 because of the release of nonfarm payrolls, but the pressure from hawkishness is on the cards. The Dow Jones Industrial Average dropped 1.03% to close at 33596.34. The S&P 500 dropped 1.44% to close at 3941.26. The tech-heavy Nasdaq Composite dropped 2% to close at 11014.89. After all, a step down to 50 basis points in December would be an unambiguous signal that a specific deceleration in policy tightening should benefit long equities and USD shorts so long as US corporates can ward off an earnings recession, keeping risk on an even keel. The dollar falls, and short-term Treasury rates fall. The 10-year Treasury yield in the United States is still hovering around 3.539%. The yield was last seen trading over 3.7% at the end of November. The policy-sensitive 2-year Treasury yield sits at 4.34%.

Although the US dollar has weakened precipitously since the beginning of December, the S&P 500 has struggled to break higher ground, then the NFP saved the DXY, and now investors find themselves torn between trading the downturn in inflation vs. the negative impact on growth due to the aggressive hiking cycle. In the meantime, DXY hits its resistance at $105.5.

Besides, with CPI, PPI, and, most importantly, the core PCE deflator pointing to weakening price pressures, the Federal Reserve’s hawkish messaging will unquestionably be challenged by the market via cycle compression. Play the short dollar card and aim for the rising potential stock market for the best risk/reward.

Main Pairs Movement

The US dollar ended Tuesday with modest gains of 0.26% daily. In the absence of an economic calendar, the safe-haven greenback attracted some risk-aversion flow during the US trading session, managing to rebound from a daily low of 104.9 to around 105.5. Now, investors are seeking safety amid gloomy economic warnings from bank chiefs at a time when concerns about the impacts of Federal Reserve policy on growth and corporate earnings are running rampant.

The GBPUSD fell 0.47% daily, as mixed market sentiment and a lack of major data, as well as optimism surrounding China and the pre-Fed blackout, allowed the GBP/USD to remain firmer. However, the pair was dropping below the 1.2140 level at the late American trading hour as the US Dollar successfully found some positive traction. In the meantime, the EURUSD fell below the 1.0470 level and recorded 0.23% losses on Tuesday.

The XAUUSD was slightly moving up with a 0.13% daily gain for the day, struggling to find a decisive direction in the absence of clues about the Federal Reserve’s rate hike policy. During the late UK trading session, gold broke through the $1780 mark, but faced heavy selling and fell below the $1770 mark during the American trading hours.

Technical Analysis

EURUSD (4-Hour Chart)

The EURUSD traded 0.45% lower throughout Monday’s trading. The Dollar Index, which tracks the U.S. Dollar against a basket of foreign currencies, rose 0.75% throughout yesterday’s trading. Without major economic data releases, EURUSD retraced higher throughout the 6^th. Observing the pair since September, EURUSD has been on a steady rise, and the pair was further stimulated after the ECB hiked rates by 75 basis points in late October. The increasingly hawkish ECB and the gradually dovish Fed could soon create a sentiment differential between the two central banks; however, compared to the EU, the economic outlook for the U.S. remains more upbeat—evident from the upward surprise of the nonfarm payrolls figure released last week.

On the technical front, the EURUSD hit our previously estimated short-term resistance in the 1.06 price range during yesterday’s trading. Short-term support for the pair remains around the 1.035 price region. The 76.4% Fibonacci retracement of 1.0391 presents itself as a short-term entry opportunity for the recovering euro. RSI for the pair sits at 53.9, as of writing. On the four-hour chart, EURUSD currently trades above its 50, 100, and 200-day SMAs.

Resistance: 1.06

Support: 1.0391, 1.035

GBPUSD (4-Hour Chart)

GBPUSD traded 0.82% lower throughout Monday’s trading. On Monday, the British pound fell against the dollar as market participants saw a dip in buying opportunities for the US currency. On Tuesday, the U.K. released its November construction PMI figure, which came in at 50.4, a downward surprise from the market consensus of 52. The lower PMI figure from the U.K. is a confident signal for the BoE as the central bank hikes interest rates by 75 basis points in November. Slowing price pressure from the manufacturing sector is a long-awaited sign for the BoE as the central bank suffers from running out of measures to tame inflation in a quickly contracting British economy. On the economic docket, the U.S. will release jobless claims figures on the 8^th and November PPI on the 9^th.

On the technical side, GBPUSD has continued to challenge our previously estimated resistance level at around the 1.23 price region. Cable has yet to break out of this resistance level, but the weakening U.S. dollar will present pound bulls with ample opportunity. RSI for the pair sits at 55.3, as of writing. On the four-hour chart, GBPUSD currently trades above its 50, 100, and 200-day SMAs.

Resistance: 1.2400, 1.2600

Support: 1.2154, 1.1927, and 1.1765

XAUUSD (4-Hour Chart)

XAUUSD retreated 1.67% throughout Monday’s trading. The precious metal met heavy selling pressure as the U.S. dollar rebounded. The momentum behind the recovering dollar was further boosted by the rise in short-term U.S. treasury yields. The benchmark U.S. 10-year Treasury yield has recovered above 3.5% and was last seen trading at 3.551%. The upward surprise of the U.S. ISM PMI index released on Monday rattled market participants, who had falsely bought into the narrative of a Fed pivot and potential slowing of interest rate hikes. Gold, however, remains attractive as global geopolitical tensions continue to rise. The Russian-Ukrainian war continues to rage on in Eastern Europe, while China’s “zero CO2” policy has sparked protests across the country.

On the technical side, XAUUSD continues to retrace from our previously estimated resistance level of $1800 per ounce. Our short-term support level estimate remains at $1735 per ounce. The 50% Fibonacci retracement level of $1769 per ounce also acts as short-term support for the yellow metal. On the four-hour chart, XAUUSD currently trades above its 50, 100, and 200-day SMAs.

Resistance: $1800

Support: $1769, $1735

Economic Data