The U.S. dollar is regaining ground as front-end Treasury yields climb following former Federal Reserve Governor Kevin Warsh’s hawkish remarks at Jackson Hole, reinforcing the inverse relationship with gold.
The ICE U.S. Dollar Index (DXY) has rebounded over the past week, recovering from two failed tests of a key support zone that included the 50% retracement of its January-to-June advance. The index has since recaptured the 200-day moving average and the 38.2% Fibonacci retracement of the same move, before stalling at the 100-day moving average on Monday. A subsequent pullback to the 38.2% Fibonacci level in early Tuesday trade gave way to a rebound during the Asian session, suggesting a potential retest of the 100-day moving average and resistance at 100 overhead.
The DXY’s trajectory has closely tracked the front-end of the U.S. yield curve, which has priced in 34 basis points of tightening by year-end, up from less than 25 basis points prior to Warsh’s speech. The correlation between DXY and two-year Treasury yields has strengthened to 0.87 over the past week, while the link weakens significantly along the curve, falling to 0.16 at the 10-year tenor.
At the same time, the inverse relationship between the dollar and gold has deepened to -0.92 over the past five days, raising the risk that further dollar strength could exert renewed pressure on the precious metal.
Gold’s technical posture has deteriorated after Friday’s sharp decline, which breached an uptrend dating back to early August. Since then, the price has consolidated within a narrowing range below $4,450, a level that has alternately provided support and resistance in recent weeks. The pattern now resembles a bear pennant, a formation that typically precedes a resumption of the prior downtrend. Analysts note initial downside targets at $4,400, followed by $4,367 and $4,315, the latter of which served as support in August.
Momentum indicators reinforce the bearish bias. The 14-day Relative Strength Index has retreated toward oversold territory near 30, while the Moving Average Convergence Divergence (MACD) remains below its signal line in negative territory. A break above pennant resistance, however, could shift the outlook toward resistance at $4,525.
