- US Dollar strengthens to 2021 highs.
- US inflation surges to 30-year highs.
- Gold rallies to five-month highs as a hedge against inflation.
- USDJPY bounces off one-month lows on dollar strength.
The US dollar strengthened to its highest level in 2021 as traders reacted to the hottest US inflation reading in generations. Renewed dollar strength came as US consumer prices surged to their highest level in more than 30 years, fuelling speculation that the Federal Reserve will be forced to hike interest rates.
Immediate data indicates that the US consumer price index rose 0.9% to 6.2% last month after a 0.4% gain in September. The spike has once again cast doubt on the belief that the inflation surge is transitory. Many investors now fear that underestimating the inflation surge could prove costly. The prospects of the FED being forced to hike interest rates continue to fuel dollar strength across the board.
XAUUSD technical analysis
In response to US inflation powering to levels not seen in decades, Gold also rose to five-month highs shrugging off dollar strength across the board. XAUUSD touched highs of $1871 before retreating on Wednesday.
Following the surge, $1834 has emerged as the immediate support supporting further price gains on XAUUSD. On the flipside, $1871 is the short-term resistance level standing in the way of the precious metal rallying probably to highs of $1900 an ounce.
With the 14-day Relative Strength Index holding firm below overbought territory, the prospects of Gold prices rallying is high. A spike to $1900 could be on the cards on XAUUSD, registering a daily close of above $1878.
Gold fundamental analysis
Gold explosion to five-month highs is in tandem with a spike in inflation as it is often seen as a hedge on this front. Open interest in gold futures rose by 24.5K contracts on Wednesday, with traded volume increasing by 150K contracts, all but affirming the bullish tone on the precious metal. The significant increase in open interest and traded volume all but open the door for the continuation of the uptrend in the near term.
Standing in the way of gold rallying further is gains on US treasury yields that could make yield-bearing securities more attractive as opposed to the precious metal. US treasury yields bounced back on Wednesday, helped by growing calls for the FED to hike interest rates, all in the effort to combat runaway inflation at 30-year highs.
The ten-year benchmark raised 12 basis points to highs of 1.57%, recouping a good chunk of the losses recorded the past week. The two-year yield currently sits at about 0.519% amid expectations that the FED could hike interest rates by June of next year.
USDJPY turns bullish
Meanwhile, USDJPY bounced back from one-month lows of 112.79 as the dollar turned bullish on growing talks of the FED being forced into rate hikes. The pair has since powered through the 114.00 level amid the upward momentum on the pair.
The spike on the USDJPY is mostly fuelled by a rally on US bond yields as traders bet on the FED, taking a more aggressive path into rate hikes. As traders continue to flee assets affected by inflation, the Japanese yen remains one of the casualties, consequently a spike in USDJPY.
The USDJPY is usually sensitive to interest rate talks. With the Bank of Japan taking a step back in easing monetary policy, let alone looking to hike interest rates, USDJPY should remain bullish. Consequently, the pair looks set to continue edging higher as the US dollar continues to strengthen across the board.
Any hints of interest rate hikes sending US bond yields higher should put further upward pressure on the USDJPY pair as well.