The US Dollar has been getting stronger for about a year, but since early this year it has been surging higher, taking the USD up, while sending EUR/USD below parity. GOLD has been declining as the USD increases, while it is also acting as a risk/commodity asset now, falling on negative news, and thus losing the safe haven appeal.

USD Index DXY Daily Chart – Heading for Record Highs?

MAs keeping DXY bullish 

I’m not a major fan of the US Dollar Index as a technical indicator but I think it paints the right fundamental picture at the moment. The dollar retraced modestly after a big runup to relieve some overbought conditions and now it’s ready to challenge the July highs.

Will it break out? Gold, on the other hand, has been bearish after the retrace higher and has fallen below moving averages, which have been acting as resistance for more than a week. We turned bearish on Gold, having several sell signals last week, and will try to sell retraces higher, as the decline is picking up pace.

Gold H4 Chart – The 50 SMA Turns Into Resistance

The decline has resumed again in XAU/USD

The FED Remains Dovish 

The catalyst for Friday’s rally in the USD was the hawkish comment from Powell. Does it mean more dollar gains? The answer is ‘yes’ but only if you think the Fed will follow through. Market pricing hasn’t changed that much for Fed hikes today. So while Powell delivered a ‘forceful’ hawkish message, there are questions on whether he can deliver.

It will depend on the US economy and today’s economic data wasn’t bullish for the dollar. US PCE inflation was lower than expected and consumer spending was light. Had we seen this kind of breakout on high inflation and/or another strong non-farm payrolls report, I’d be more convinced.

Perhaps a better case for the dollar is relative performance. The US might not be sizzling and the Fed might not continue with 75 bps hikes but it’s certainly more than you will get elsewhere. Europe is in a full-scale energy crisis with a recession right around the corner.

Japan is losing its status as the safe-have currency of choice and commodity-importing emerging markets are in trouble, creating direct flows into dollars. That’s a nice mix and it’s what’s fueled the dollar rally all year long. Oftentimes, that kind of structural rally doesn’t just fizzle, it leads to a spike.

The dollar retracement in the past five weeks was partly inspired by the Fed but also came with the risk picture improving. Now that the dollar is the safe haven of choice, it can rally if we see a further deterioration in stocks.

The 3.8% decline in the Nasdaq last Friday was a strong signal that we’re not at the bottom of the bear market yet. If this mood continues for another few weeks, the dollar breakout could have legs.

Gold XAU Live Chart