AUD/USD, gold wilt as coordinated Fed pushback sparks US dollar reversal

• Fed messaging conveys no need to deliver fast, super-sized rate cuts
• Jerome Powell speaks at Jackson Hole economic symposium on Friday
• US economic data continues to hold up, further diminishing recession fears
• AUD/USD, gold reverse hard, delivering obvious market topping patterns

Overview

An obvious and coordinated pushback from Fed officials against market pricing looking for aggressive rate cuts in the months ahead has sparked a reversal in the US dollar, combining with solid US economic data to push AUD/USD sharply lower. Given the likelihood Fed chair Jerome Powell will maintain that message when he speaks on Friday, an obvious topping pattern in AUD/USD and gold on the dailies should have traders on alert for further near-term downside.

Fed speak not dovish enough to justify market pricing

The early messaging from Fed officials at Jackson Hole was clear and plain to see. 

Boston Federal Reserve President Susan Collins said the upcoming rate cuts should be "gradual” and “methodical" in nature, providing a message that counters views from some market commentators of the need to deliver super-sized cuts to get policy rates back towards neutral settings.

"The orderly rebalancing we've seen has been encouraging and very helpful overall, and a gradual methodical approach to revisiting our policy stance over time…will continue to be appropriate," Collins said in an interview with Reuters. "We're well positioned and…preserving that healthy labor market as we continue to bring inflation down is important."

Federal Reserve Bank of Philadelphia President Patrick Harker delivered a similar message to Collins, suggesting a methodical approach was required when reducing interest rates.  

“I think a slow, methodical approach down is the right way to go, he said during an interview with Reuters. “For me, barring any surprise in the data we'll get between now and [the FOMC September meeting], I think we need to start this process [of lowering rates].”

Kansas City Fed Bank President Jeff Schmid, the host of the Jackson Hole symposium, delivered a more hawkish message to traders, suggesting he’ll let the data determine when and by how much the Fed should move.

“I'm going to let the data show where we lead,” he said in an interview with CNBC.

Powell likely to maintain data dependent message

The uniform message from Fed speakers was likely by design rather than a coincidence, helping to massage messaging ahead of Jerome Powell’s highly anticipated speech at 10am EDT on Friday. It’s now a safe bet that he will discuss the rates outlook and the conditionality around how the Fed should proceed, depending on incoming economic data. 

Along with the gentle reminder to markets to not overdo rate cut expectations, incoming economic data also helped to spark a reversal in shorter-dated US interest rates, providing relief to the US dollar after a string of down days.

US economic data continues to hold up

Initial jobless claims inched higher by 4,000 to 232,000 last week, a touch above consensus. Pending home sales rose 1.3%, lifting for the first time in five months from depressed levels, while the latest flash US services PMI from S&P Global pointed to ongoing strength in the largest and most important part of the US economy, lifting to 55.2, counteracting a weak read for the far smaller manufacturing sector.

Truth be told, though. Much of the move in yields at the front of the US Treasury curve was sparked by Schmid’s comments at the start of North American trade.

AUD/USD reverses as rate differentials narrow, risk reverses

Unlike earlier this month where a rise in US yields was interpreted as a lesser risk of a US recession, supporting cyclical asset classes, recent moves at the front of the curve are now more a reflection of how fast and by how much the Fed will need to lower rates this cycle.

That weighed on AUD/USD and other risker asset classes on Thursday, delivering an obvious evening star on the daily chart, a pattern often seen around market turning points. With bullish momentum on RSI (14) waning with the uptrend dating back to August’s lows now broken, downside risks look to building.

Having closed below horizontal support at .67148, traders can now use this level to build trade setups around. While the option is there to sell now and place a stop above the level, I’d prefer to see whether we get a retest at some point on Friday. Old habits die hard, and traders have known little other than buying the dip for much of August.

Should the price retest and be rejected at .67148, it provides the opportunity to short with a tight stop above for protection. Potential downside targets include the 50-day moving average at .66484, the 200-day moving average at .66061, or horizontal support at .65688.

Gold wilts but dip buyers lurking

Like AUD/USD, the gold price did not enjoy the combination of higher US Treasury yields and a stronger US dollar on Thursday, pulling back further from record highs and delivering an evening star of its own on the daily. RSI (14) has also broken its uptrend, indicating building bullish momentum may be  stalling or reversing.

Having probed below it earlier in the session, it’s notable that gold managed to crawl higher into the US close, finishing above the former record high of $2483.76 set in July. That looms as a potential level for traders to build setups around, allowing for a stop to be placed on the opposite side to entry to provide protection against reversal.

The uptrend break of RSI and evening star patten suggest downside risks are more apparent than upside in the near-term, but I’m not wedded to the idea. Initial downside targets include minor support at $2470, $2432 and $2418. But if the price fails to probe and stay below $2483.76, consider buying with a stop below targeting a retest of the former highs.

-- Written by David Scutt

Follow David on Twitter @scutty