Market update: US dollar sinks, holds on for dear life, setups on gold, EUR/USD, GBP/USD

The US dollar, as measured by the DXY index, sank nearly 0.65% to 101.75 on Thursday, hitting its lowest level since late July, with thinner liquidity ahead of the Christmas holidays possibly amplifying swings and, in this case, losses for the American currency.

The Federal Reserve’s pivot this month has been largely responsible for the greenback’s recent pullback. Although the Fed kept borrowing costs unchanged at its last meeting of the year, it signaled that it would slash rates several times in 2024, officially acknowledging that talk of easing its stance has begun.

Impact of central bank's dovish stance on treasury rates and market dynamics

The central bank’s dovish posture, which took many investors by surprise, has triggered a major slump in treasury rates, sending the two-year note below 4.40%, a significant retracement from the cycle high of 5.25%. The 10-year bond, for its part, has plunged beneath the 4.0% threshold, after being on the verge of topping 5% in late October.

With US yields biased to the downside, and risk-on sentiment on full display in equity markets, the US dollar may extend losses in the near term. This could mean more gains for gold prices, EUR/USD and GBP/USD moving into the last week of 2023.

While the greenback’s outlook could change next year if US economic strength and lack of progress on inflation prevent rate cuts, the narrative is unlikely to change for the time being. New narratives take time to build and develop, and often require confirmation from data to gain traction.

EUR/USD technical analysis

EUR/USD is pressing against cluster resistance near the 1.1000 handle after Thursday’s rally. If buyers manage to propel prices above this technical barrier in the coming trading sessions, a potential move toward 1.1085 might be on the cards. On further strength, the focus shifts higher to 1.1125, which corresponds to the upper boundary of a short-term rising channel.

Conversely, if the pair gets rejected at resistance and sellers return in force to exploit the reversal, initial support is located around 1.0830, near the 200-day simple moving average. This region might offer a potential foothold during a retracement ahead of a rebound, but a move below it could be ominous, paving the way for a drop toward channel support at 1.0770.

EUR/USD technical chart

GBP/USD technical analysis

After some softness earlier in the week, GBP/USD managed to rebound off confluence support around the 1.2600 mark, consolidating above the 1.2700 threshold on Thursday. If gains accelerate heading into the weekend, the first technical barrier to overcome stretches from 1.2727 to 1.2760. Based on historical patterns, prices might face resistance in this range, but a breakout could propel the pair towards 1.2840.

In the event of a bearish reversal, potentially magnified by low holiday trading volume, the first defensive line against a pullback is located around the 1.2600 handle, as previously articulated. Should this floor cave in, attention will gravitate towards the psychological 1.2500 level near the 200-day simple moving average, followed by 1.2455.

GBP/USD technical chart

Gold price technical analysis

Gold fell sharply early this month when a fakeout devolved into a large selloff, but has regained ground in recent days after bouncing off trendline support at $1,975, with bullion currently approaching $2,050 – a key resistance. If history is any guide, prices could be rejected from this area, but a breakout could open the door to a retest of $2,075. Continued strength could bring back focus on the all-time high at $2,150.

On the other hand, if the recovery stalls and XAU/USD pivots lower, technical support emerges at $2,010. Maintaining this floor is imperative for the bulls; a failure to do so could reinforce downward momentum, sending the precious metal reeling toward trendline support near $1,990. Below this threshold, the crosshairs will be on $1,975.

Gold price technical chart

_{This information has been prepared by DailyFX, the partner site of IG offering leading forex news and analysis. 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.}