US Dollar rallies as Powell delivers harsh warning on rate hikes

• The Greenback traded substantially higher overnight. 
• Traders got caught by surprise as Powell delivered surprisingly hawkish remarks. 
• The US Dollar Index nearly broke above 106.00, but softened a bit in European trading. 

The US Dollar (USD) eases mildly on Friday’s European morning after surging overnight due to Federal Reserve Chairman Jerome Powell’s hawkish comments, which caught traders by surprise. The Fed’s Chairman signalled that policymakers are not scared of increasing interest rates further if needed, which goes against market consensus that the Fed is done hiking and cuts will be soon at hand. The surprise was even more bigger as earlier Atlanta Fed President Raphael Bostic and Richmond Fed President Thomas Barkin  delivered very dovish comments. 

On the economic data front, traders will need to assess the words of Powell before heading into the weekend. With only one Fed speaker still to come, the focal point on Friday will be the preliminary Michigan Consumer Sentiment Index and the Consumer Inflation Expectations. Should those decline further, the US Dollar Index (DXY) could be seen squaring back its gains from late Thursday evening and close this week off flat or with a small profit. 

Daily digest: US Dollar has Powell to thank for

• These are the main takeaways from US Fed Chairman Powell speech on Thursday evening:
• “We are not confident that we have achieved the right stance for inflation.”
• “Continued inflation progress is not assured.”
• “[The] Fed will not hesitate to tighten more if appropriate. We are not confident that we have done enough to achieve the stance to hit 2% inflation.”
• Dallas Fed President Lorie Logan is due to make some comments at 12:30 GMT.
• The only important data point on Friday will be the preliminary report from the University of Michigan for November:
• The Consumer Sentiment Index is expected to fall marginally,  from 63.8 to 63.7.
• The 5-year Consumer Inflation Expectation came in at 3% in October.  
• Equities are not digesting Powell's speech well: The Chinese Hang Seng is down over 1% and European equities are in the red over 0.50%. US equity futures are trading marginally in the green in pre-market opening.  
• The CME Group’s FedWatch Tool shows that markets are pricing in a 90.7% chance that the Federal Reserve will keep interest rates unchanged at its meeting in December. 
• The benchmark 10-year US Treasury yield trades at 4.60%, after Powell reiterated that more hikes might be needed to battle inflation. 

US Dollar Index technical analysis: US Dollar gets brief kick-start

The US Dollar got a boost from the hawkish comments from Fed’s Powell. However, the boost starts to fade quite quickly on Friday’s European trading. It looks like that King Dollar, tracked by the DXY Index, is not able to make a comeback, which means more downside could be in the cards. 

The DXY was looking for support near 105.00, and has been able to bounce ahead of it earlier this week. Any shock events in global markets could spark a sudden turnaround and favour safe-haven flows into the US Dollar. A rebound first to 105.85 would make sense, a pivotal level from March 2023. A break above could mean a revisit to near 107.00 and recent peaks printed there.

On the downside, 105.10 is still acting as a line in the sand. Once the DXY slides back below that, a big air pocket is opening up with only 104.00 as the first big level, where the 100-day Simple Moving Average (SMA) can bring some support. Just beneath that, near 103.50, the 200-day SMA should provide similar underpinning.