USDX Still Has Room to Rise After Market Repricing

Summary:

The current financial market turmoil might be gradually coming to an end, barring any new developments. The remaining questions revolve around whether the market has overly feared a U.S. recession and how the Fed's policy path will be re-evaluated.

Buy USDX

End Time

CLOSED

102.800

ENTRY

103.630

TGT

102.350

99.460 +0.330 +0.33%

Points

Profit

102.350

102.870

CLOSING

102.800

ENTRY

103.630

TGT

Fundamentals

The financial market upheaval, initially triggered by the unexpected 15 basis points rate hike by the Bank of Japan last Wednesday, appears to be stabilizing. The release of the U.S. July ISM Non-Manufacturing Index, which exceeded expectations by rising from 48.8 to 51.4, alleviated some recession fears and sparked a global market rebound. This recovery was evident in the rise of gold from $2,374, the U.S. stock market rally, and the increase in the U.S. dollar index.

The severe market turmoil was unexpected by many. The Bank of Japan's rate hike was unexpected due to Japan's long-standing negative interest rate policy, which made the yen a popular choice for carry trades and interest rate differential transactions, such as common forex swaps and currency basis swaps.

The BOJ rate hike, coupled with the market's pricing of a Fed rate cut in September, led to a significant reduction in the yen-dollar interest rate differential. This resulted in the destruction of $20 trillion in yen carry trades, a sharp rise in the yen, and the liquidation of high-leverage investments, culminating in a historic market crash in Japan.

Moreover, traders were not merely shorting the yen but were engaging in a strategy of "longing Japanese stocks while shorting the yen," which led to simultaneous failures of both strategies. This was the fundamental cause of the market upheaval.

However, global stock markets have rebounded from the crash as of yesterday, with European, U.S., and Japanese indices all recovering. If no new negative events occur, the financial turmoil may subside.

The main issues now are whether the market's fears of a U.S. recession are exaggerated and how the Fed's policy path will be re-evaluated. Recent nonfarm payroll data, showing a further increase in unemployment and a significant reduction in job numbers, has heightened market expectations for a Fed rate cut. However, this data may exaggerate labor market weaknesses, and it may not be as severe as it appears.

On the other hand, Chicago Fed President Austan Goolsbee indicated that the Fed would not overreact and that there is no crisis requiring immediate rate cuts. It thus highlights the Fed's cautious stance as the most dovish Fed member is not suggesting a rate cut. Therefore, considering the recent movements in the U.S. dollar index, there may still be significant room for a rebound.

Technical Analysis

The dollar index (USDX) has fallen below its descending channel in the daily chart. The recent low is supported by the 0.382 Fibonacci retracement level (102.562) and is resisted by the 0.5 Fibonacci level (103.476), which also aligns with the bottom of the descending channel, acting as strong short-term resistance. The USDX needs to break above this resistance to confirm a trend reversal.

In the Ichimoku Cloud, both the baseline (Kijun-sen) and conversion line (Tenkan-sen) are moving sideways, indicating a stable trend, while the current price is significantly deviating from both lines, suggesting a potential short-term rally.

USDX Still Has Room to Rise After Market Repricing_1

Trading Recommendations

Trading Direction: Buy

Entry Price: 102.8

Target Price: 103.63

Stop Loss: 102.35

Support: 102.981, 102.56, 101.5

Resistance: 103.47, 104.37

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Jason

Analysts

I have an in-depth study of fundamentals, especiaslly for the US dollar market. I'm good at short and medium term trading by virtue of my profound financial theoretical knowledge and extensive practical experience.

Rank

Articless

433

Win Rate

42.81%

P/L Ratio

1.58

Focus on

USDX, EURUSD, XAUUSD

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