Markets stabilise while dollar surge continues

Written by Lukman Otunuga, Senior Research Analyst at FXTM

Asian stocks were mixed on Thursday as investors evaluated the likely impact of surging global energy prices and weak economic data from China. Despite the lingering caution, easing concerns revolving around the China Evergrande situation soothed some jitters. European stocks have opened on a positive note while US futures are pointing to a higher open on Wall Street this afternoon.

A sense of calm has certainly returned to financial markets following the heavy selloff across equities witnessed earlier in the week. Nevertheless, it continues to highlight how markets remain highly sensitive to rate hike expectations and inflation. With a cavalry of US policymakers, including Fed Chairman Jerome Powell scheduled to speak today, markets could be injected with a fresh dose of volatility if more clues are offered about the path for the Fed tightening cycle.

Dollar Index hits one-year high

Expectations over the Federal Reserve tapering as soon as November have injected dollar bulls this week with fresh confidence to charge higher. Buying sentiment towards the currency has also been boosted by the prospect of a US interest rate increase as early as next year.

fresh confidence to charge higher. Buying sentiment towards the currency has also been boosted by the prospect of a US interest rate increase as early as next year.

Since early September, the dollar index (DXY) has been trending higher with bulls stampeding through multiple walls of resistance. On Wednesday, the DXY hit a fresh 2021 high above 94.40 and could extend gains if policymakers strike a hawkish tone.

Both Chair Jerome Powell and US Treasury Secretary Janet Yellen are due to testify before the House Financial
Services Committee today. Earlier in the week, Treasury Secretary Yellen warned that the United States would face a financial crisis and economic recession unless Congress lifted the debt ceiling. Given how today is the deadline for Congress to avert a government shutdown, the next few hours could be tense.

Commodity spotlight – Gold
It has been a lacklustre week for gold thanks to an appreciating dollar and higher Treasury yields. The precious metal remains under pressure amid taper expectations and prospects of a Fed rate hike as soon as next year. Given the metal’s zero-yielding nature, the final quarter of 2021 could be rough and rocky if the current fundamental themes remain intact.

With regards to the technical picture, bears are in control with consistently lower lows and lower highs forming a bearish channel. Although the path of least resistance points south, short-term price action may be influenced by the core PCE data set to be released on Friday which is the Fed’s preferred inflation gauge. In the meantime, a breakdown below $1725 may open the doors towards $1700.