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USDX: Despite Sharp Pullback, USD's Safe-Haven Attributes Keep It Popular

Inflation and RecessionForex Market
Summary:

The U.S. dollar experienced its worst single-month performance in 12 years in November and has since extended its losses. Market expectations that the Fed will slow the pace of interest rate hikes were an important factor directly driving the USD off its highs. Nonetheless, the USD remains popular due to its safe-haven status as the risk of recession rises.

Buy USDX
End Time
CLOSED

105.026

ENTRY PRICE

109.410

TGT PRICE

101.250

SL PRICE

101.888 0.000 0.00%

626

Points

Loss

101.250

SL PRICE

104.400

CLOSING

105.026

ENTRY PRICE

109.410

TGT PRICE

Fundamentals

After nine consecutive months of strong gains in 2022, the U.S. dollar has been pushed off its highs by concerns that the Federal Reserve will slow the pace of interest rate hikes.
The U.S. Dollar Index, which tracks the USD against a basket of other (six) currencies, posted its worst one-month performance in 12 years in November, falling more than 5%, and fell a further 0.8% in December. If it continues to languish by the end of the month, it is on track to post its third consecutive monthly decline.
As the Fed aggressively raised interest rates to stem the fastest rise in inflation since 1980, the USD rose strongly between January and September, gaining 17% overall. Rising interest rates tend to draw back the USD as it attracts investors seeking higher yields.
The Fed has raised its benchmark rate by 75 basis points in each of the last four meetings. The market now expects it to slow the pace in December and raise rates by a smaller margin of 50 basis points after inflation cools slightly in October, which has caused the USD to give back some of its 2022 gains.
It was because many investors believed that the USD's dominance would not last long after the Fed's continued sharp rate hikes. At the time (with the USD above 110.00) long positions were very crowded, and many were profitable positions. This was at a time when profit-taking conditions were at their best.
Times have changed. With current prices relatively stable following the current sharp pullback, investors tend to view the USD as a safe-haven asset in times of heightened economic and geopolitical uncertainty. It remains likely to see new demand in 2023 amid the growing risk of a global economic downturn and the ongoing state of damage caused by the Russia-Ukraine war.
Meanwhile, inflation remains at 7.7%, which is well above the central bank's 2% target level, even though investors are ready to adjust their positions before the Fed suspends its monetary tightening or even changes its policy path. (The USD remains welcome after the adjustment.) If the market underestimates the Fed's willingness to continue raising rates to curb soaring prices, the USD will be one of the main beneficiaries. Because when the Fed made it clear that it would rather do too much than too little, the market over-speculated a dovish turn. Our expectation (for the USD) is that it will continue to be popular in 2023 (although it will not test the top again).
USDX: Despite Sharp Pullback, USD's Safe-Haven Attributes Keep It Popular_1

Technical Analysis

Fears of a slowdown in the U.S. economy were rekindled and the USD came under pressure after yesterday's rise in jobless claims fueled fears that the economy could fall into recession in 2023.
After the bulls were trapped above the 200-day SMA, the U.S. Dollar Index recorded its third consecutive day of decline and is likely to fully retrace its recovery range from 104.05.
The technical structure remains bearish in the daily chart as downward momentum continues, albeit at a slower pace. Meanwhile, the short-term and medium- to long-term (10-day/200-day) moving averages are in a (death cross) fully bearish position, putting pressure on their near-term action.
Nevertheless, fresh bears found a pause at the (76.4% of 104.05-105.78) Fibonacci retracement of 104.45, with signs of extended consolidation while the price holds above this level.
This could be an initial positive signal as an "inverted hammer" reversal pattern is forming in the weekly chart, however, this needs to be verified by a stronger signal, which seems unlikely for now (as it hasn't closed today) but should be taken into account.
Overall, the current turn down of the 10-day SMA keeps bears intact, putting it on track to eventually push prices to the key support level at 104.05, a loss of which would signal a bearish continuation. Bears will only leave the market if the key 200-day SMA barrier is firmly broken. But as we mentioned before, the USD has retraced sharply since the top and while it will not test the top again, higher inflation and the Fed still being in a rate hike cycle makes the USD still welcome. It is recommended to buy the dips.

Trading Recommendations

Trading Direction: Long
Entry Price: 104.00
Target Price: 109.41
Stop Loss: 101.25
Valid Until: 2022-12-23 23:55:00
Support: 104.45, 104.05, 103.07, 101.94
Resistance: 104.95, 105.36, 105.64, 105.94
Risk Warnings and Investment Disclaimers
You understand and acknowledge that there is a high degree of risk involved in trading with strategies. Following any strategies or investment methodologies is the potential for loss. The content on the site is being provided by our contributors and analysts for information purposes only. You alone are solely responsible for determining whether any trading assets, or securities, or signal, or any other product is suitable for you based on your investment objectives and financial situation.

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Eva Chen

Analyst

Master of Economics, 8 years in the financial industry, CFA holder, joined HSBC (Hong Kong) Bank in 2013 after graduating from the University of California, USA in the Investment Research and Markets Department. With years of financial market experience and trading experience, having provided excellent investment advice to many brokerages, entity derivatives importers and clients in Greater China.

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480

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P/L Ratio

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Focus on

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