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Market update: US dollar outlook after Powell


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Too soon to say if USD has topped; EUR/USD and GBP/USD appear to be in search of a bottom; AUD/USD drifts lower. What is the outlook and key levels to watch in EUR/USD, GBP/USD, and AUD/USD?

 

original-size.webpSource: Bloomberg

 

 Manish Jaradi | IG Analyst, Singapore | Publication date: Friday 20 October 2023 07:03

The US dollar continues to trade strongly amid rising yields and escalating tensions in the Middle East, after US Federal Reserve Bank Chair Jerome Powell stopped short of hinting that interest rates have peaked.

Powell acknowledged the impact of tightening of financial conditions but stopped short of closing the possibility of further tightening, given the strength of the economy and tight labor markets. However, Powell echoed the remarks of some of his colleagues saying the rise in yields “at the margin” might lessen the need for additional hikes. On balance, it appears that Powell’s tone was a touch dovish, though the central bank isn’t prepared to close the door yet on further tightening. The market is pricing in a high chance that the Fed will keep interest rates steady at its 31 October – 1 November meeting.

The US dollar has been driven higher in recent months, thanks to the outperformance of the American economy relative to the rest of the world coupled with a relatively hawkish Fed compared with its peers.

Even if the market leans toward the view that US rates have pivoted, unless there is economic convergence, the US dollar could stay well bid even if there is monetary policy convergence.

DXY index weekly chart

 

original-size.webpSource: TradingView

On technical charts, the index is testing major resistance on the upper edge of the Ichimoku cloud on the weekly charts, not too far from the March high of 105.90. While the greenback’s rally may have stalled for now, it is too soon to say it is over. For the immediate upward pressure to fade, the index at minimum would need to fall below initial support at last week’s low of 105.50.

EUR/USD weekly chart

 

original-size.webpSource: TradingView

EUR/USD: is this it?

EUR/USD’s slide has paused at key support at the March low of 1.0500, near the lower edge of the Ichimoku cloud on the weekly charts. This support is strong and may not be easily broken, at least in the first attempt, especially given the sharp decline in recent weeks. So, a minor rebound wouldn’t be surprising. Having said that, for a meaningful rebound to occur the pair needs to break above this month’s high of 1.0635. Until then, the balance of risks remains tilted sideways to down.

GBP/USD weekly chart

 

original-size.webpSource: TradingView

GBP/USD: in search of a bottom

GBP/USD appears to be in search of a low with the slide pausing around key support at the May low of 1.2300. Granted, the pair looks oversold as speculative long GBP positioning has been unwound. Still, there’s no evidence of a price reversal ahead of strong converged support at the early 2023 lows of around 1.1800, not too far from the lower edge of the Ichimoku cloud on the weekly charts.

AUD/USD: gradually drifting lower

AUD/USD appears to be gradually losing grip as it struggles to hold above support on the lower edge of a declining channel since August, around minor support at the early-October low of 0.6285. The repeated lower-lows-lower-highs indicate downside risks prevail unless AUD/USD breaks above resistance at the end-August high of 0.6525.

AUD/USD daily chart

 

original-size.webpSource: TradingView

 

 

 

This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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