Market mood stabilises ahead of Powell

Asian markets stabilised somewhat on Tuesday morning following the broadly negative cues from Wall Street overnight as concerns over higher US interest rates left investors on edge. US and European futures seem to be pointing to a positive open despite the overall caution, with all attention directed towards commentary from Fed Chair Jerome Powell later today. In the currency space, the dollar pulled back slightly along with Treasury yields, allowing other G10 currencies room to fight back. Although gold has taken the opportunity to shine this morning, last Friday’s blockbuster jobs data may set the tone for direction in February.

In other news, the Reserve Bank of Australia hiked interest rates to the highest level in over 10 years. As expected, the central bank announced a 25-basis point hike, taking the cash rate to 3.35%. Buying sentiment towards the Aussie received a boost as markets saw the statement as hawkish with more tightening signaled down the road. AUDUSD is up over 0.7% this morning, trading back within a narrow range with resistance found at 0.7000. A softer dollar could support upside gains in the short term.

All eyes on Jerome Powell

After last week’s freakishly strong US jobs data, market expectations around the Fed switching to rates cuts later in 2023 have taken a massive hit. The robust strength of the US labour force is expected to fuel fears over inflation remaining stubbornly high, ultimately empowering the Fed hawks. Given the latest developments, much attention will be directed on Powell’s tone, messaging and whether fresh insight is offered over monetary policy for 2023, especially after the market’s dovish reaction to his recent FOMC press conference. Should the central bank head signal that rate cut bets were misplaced, this could boost dollar bulls along with Treasury yields. It will also be wise to keep a close eye on US President Joe Biden’s second State of Union address later this afternoon. Biden is expected to use this event to address key topical matters revolving around geopolitical developments and other important themes.

Talking technicals, the DXY still remains in a downtrend on the daily charts despite the recent breakout above 103.00. Prices need to push prices back above 105.00 for the outlook to swing in favour of the bulls. A move back below 103.00 could trigger a selloff towards 101.20 – 101.00.

Currency spotlight – EUR/USD

A broadly stronger dollar may ensure EURUSD remains under pressure in the short to medium term. Since failing to secure a solid weekly close above the 1.0900 resistance level, prices have been under noticeable pressure despite the ECB recently raising interest rates to combat inflation. The main risk event for the euro this morning will be Germany’s industrial production figures for December. A figure that exceeds market expectations could provide some support to the euro.

Looking at EURUSD, prices are wobbling above 1.0700 as of writing. Should this level prove to be reliable support, a move back towards 1.0900 could be on the cards. Weakness below 1.0700 may open a path towards 1.0550.

Commodity spotlight – Gold

Gold drew strength from a slightly weaker dollar and small drop in Treasury yields on Tuesday as investors braced themselves for Jerome Powell’s speech.

If Powell strikes a hawkish note and signals that the Fed will still be hiking rates down the road, gold prices are likely to suffer as the dollar jumps. Alternatively, a cautious sounding Powell could offer the precious metal a lifeline which could limit downside losses. Looking at technical levels, a breakdown below $1860 may open the door towards $1825 and $1800, respectively. If prices can push back above $1900, gold could challenge $1950 and $2000.