"Dot Plot" Determines Dollar Trend, Wary of Risk Aversion

Summary:

Influenced by the possible escalation of the war between Russia and Ukraine, the dollar rises in the short term due to risk aversion. The forthcoming Interest Rate Decision may cause the dollar to fall in the short term, but it cannot change the overall upward trend of the dollar. And it is even possible that the dollar will reverse its decline into a rise with the support of risk aversion.

BUY USDX

EXP

EXPIRED

110.114

Entry Price

111.300

109.000

98.040 +0.030 +0.03%

Pips

EXPIRED

109.000

113.095

Exit Price

110.114

Entry Price

111.300

Fundamentals

Influenced by risk aversion, the dollar was in a slightly unilateral upward trend on Tuesday, rising 0.55% at the close. This week, 12 central banks will announce Interest Rate Decisions. Yesterday's aggressive rate hike of 100 basis points by the Riksbank led to concerns that aggressive rate hikes by central banks around the world could exacerbate the risk of recession. As a result, the dollar rose.

After the opening of the day, the dollar was basically trading sideways as the Fed's policy meeting approached. But the "silence" was broken by Putin's speech, which was his first national address since the Russia-Ukraine conflict. In his speech, Putin said that the West has crossed all boundaries in its aggressive anti-Russian policy. To ensure sovereignty and territorial integrity, he announced a partial mobilization of 300,000 people starting today. This indicates that "the Russia-Ukraine conflict may be on the verge of escalating into war".

And this further strengthens the dollar's appeal as a safe-haven currency. Affected by this, the dollar rose 0.35% to 110.873 in the short term.

The Fed's interest rate decision for September, which has been long awaited by the market, is about to be announced. And CME's FedWatch Tool tool shows an 82% probability of a 75-basis point hike and an 18% probability of a 100-basis point hike. Nick Timiraos, the chief economics correspondent of the Wall Street Journal, was even more outspoken in his article "Fed's Third Straight 0.75-Point Interest-Rate Rise Is Anticipated". However, as the expectation has been digested by the market for a long time, the dollar may fall due to the market behavior of "Buy the rumor, sell the news" at the moment of the announcement of the interest rate decision.

But this can only be considered the first wave of the marketing hype "after the Fed announced the rate hike", and this week's hype on the details will be more in-depth. After this round of rate hikes, interest rates will reach 3%-3.25%. The focus needs to be on whether the Fed announces that rates are entering the restrictive territory, as this implies a slowdown in subsequent rate hikes. In addition, the terminal rate shown in the dot plot also needs to be paid attention to. This is because, since the release of the August CPI, the market's attention has shifted from the magnitude of the September rate hike to the terminal rate, which will affect the market's assessment of the Fed's subsequent policy path.

In addition, the meeting will also release updated GDP, CPI, and unemployment expectations. And the next phase of the tightening cycle will pose greater economic risks, which will likely be reflected in their revised economic forecasts.

Finally, it should be noted that after this meeting, the Fed will not hold a policy meeting until November. If the Fed still sends strong signals at this meeting to show its determination to fight inflation, the market may then instead become concerned about the possibility that aggressive rate hikes will exacerbate the recession during this one-month gap.

By then, coupled with the economic risks posed by the eurozone energy crisis and the risk of an escalating war between Russia and Ukraine, the dollar may be supported by risk aversion and rise. In other words, this meeting is unlikely to change the dollar's uptrend. And even risk aversion may directly make the dollar reverse its decline to a rise in the current meeting. USDX: "Dot Plot" Determines Dollar Trend, Wary of Risk Aversion_1

USDX: "Dot Plot" Determines Dollar Trend, Wary of Risk Aversion_1

Technical Analysis

In the 4H chart, the dollar hit a new 20-year high of 110.873 due to risk aversion. And the dollar is just a step away from strong resistance at 111.30, which was the last support when the dollar fell from the 120 high in 2001-2002. Support, the top of the ascending channel, is at 109.926 in the short term, and the dollar may continue its downward movement to the 23.6% Fibonacci Retracement (109.178) if it breaks below this line. As for the indicators, Stoch, DMI, and Ichimoku all show that the dollar has signs of a retracement in the short term. Considering the possible decline of the dollar at the moment of the announcement of the decision, as well as the risk aversion caused by many events, it is recommended to go long after the dollar falls.

Trading Recommendations

Trading direction: Long

Entry price: 110.114

Target price: 111.30

Stop loss: 109.00

Support: 110.309/109.926/109.443/109.178

Resistance: 110.873/111.30

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