KVB Market Analysis | 22 Oct: Dow Drops 350 Points Amid Fears of Prolonged High Fed Rates

Product: XAU/USD

Prediction: Increase

Fundamental Analysis:

Gold trades just below its record high, down 0.09%, as US Treasury yields rise over 10 basis points, reaching 4.192%. Safe-haven flows continue amid Middle East hostilities and US election uncertainty with polls showing a tight race between Harris and Trump. Fed officials hint at gradual rate cuts, but a 25 bps cut at the November meeting remains heavily priced in.

Technical Analysis:

Gold prices are set to extend the gains, though the formation of a ‘gravestone doji’ could open the door for a pullback. Momentum shows signs that buyers remain in charge but are losing some steam as depicted by the Relative Strength Index (RSI). The RSI, despite being bullish, has shifted flat. If XAU/USD clears the October 21 high at $2,740, the next stop would be $2,750, followed by $2,800. Conversely, if XAU/USD retreats from record highs below $2,700, it could pave the way for a pullback. The first support would be the October 17 high at $2,696, followed by the October 4 high at $2,670.

Product: EUR/USD

Prediction: Decrease

Fundamental Analysis:

EUR/USD resumed its steep multi-week retracement on Monday, flirting with two-month lows near the 1.0800 neighbourhood and maintaining the trade below the crucial 200-day Simple Moving Average (SMA) at 1.0871. Meanwhile, the US Dollar (USD) stayed strong, pushing the US Dollar Index (DXY) just pips away from the 104.00 barrier, a region last seen in early August. This extra advance in the Greenback was bolstered by multi-week peaks in US yields across the spectrum. The Dollar's rally, which has been ongoing since the start of the month, has been propped up by robust US fundamentals and a cautious tone from Federal Reserve (Fed) officials, while the resurgence of the “Trump trade” on Monday also contributed to the robust uptick. While many policymakers appear to favour a 25 basis point cut next month, some, like FOMC Governor Michelle Bowman and Atlanta Fed President Raphael Bostic, showed some caution. Bostic has even suggested that the Fed might skip a cut in November. According to the CME Groups FedWatch Tool, markets are currently pricing in around an 85% probability of a quarter-point cut next month.

Technical Analysis:

Further declines might push EUR/USD to its October low of 1.0810 (October 17), ahead of the key of 1.0800 and prior to the August low of 1.0777 (August 1). On the upside, the 100-day and 55-day SMAs at 1.0935 and 1.1038, respectively, act as temporary resistance. The 2024 top of 1.1214 (September 25) is likely to be followed by the 2023 peak of 1.1275 (July 18). Meanwhile, if the pair remains below the critical 200-day SMA of 1.0871, the outlook may deteriorate. The four-hour chart shows the pair resuming its downward trajectory. Nonetheless, early support is at 1.0810, followed by 1.0777. On the upside, the 55-SMA at 1.0897 leads, followed by 1.0954 and the 100-SMA at 1.0968. The relative strength index (RSI) fell below the 30 yardstick.

Product: US30

Prediction: Decrease

Fundamental Analysis:

The Dow Jones Industrial Average (DJIA) backslid on Monday, tumbling nearly 350 points and shedding eight-tenths of one percent as equity markets ease back from recent record highs. The Dow bore most of the bearish burden to kick off the new trading week, with losses consolidated largely within the major equity index. Bond yields ticked higher and construction stocks swooned on the day, with fresh fears across the broader market that the Federal Reserve (Fed) would be forced to keep interest rates higher for longer. Despite delivering a jumbo rate cut of 50 bps in September, investors are balking at the fact that the US economy remains stubbornly resilient, implying it could take the Fed even longer than expected to finally drag core inflation down to the 2% annual target.

Technical Analysis:

The Dow Jones is giving mixed signals on daily candlesticks. Price action continues to grind deeper into bull country as bidding momentum outpaces long-term moving averages. However, technical indicators are going on the fritz after spending months flashing warning signs of overbought conditions. The Dow backpedaled from a recent record high north of 43,200 set last Friday, testing back below 43,000 and shedding over 300 points. Despite the pullback, prices are pinned firmly on the high side, with the 50-day Exponential Moving Average (EMA) well below near-term price action at 41,740. The Moving Average Convergence-Divergence (MACD) is currently above the zero line, a bullish signal, but the histogram shows a declining momentum. The fast MACD line is now close to crossing below the slower signal line, signaling that bearish momentum could soon take over. This could point to a short-term correction, especially if sellers manage to push the price below the 42,000 level.