Expectations of a Rate Hike are Rising Again and the USD Will Continue to Rise

Summary:

The resignation of British Prime Minister Liz Truss has brought a brief sigh of relief to the markets while also worrying about the future of the UK and the measures that could affect the stability of the financial markets; the dollar has therefore come out of market whiplash. Overall, the USD is still supported by interest rate hike expectations.

BUY USDX

Close Time

CLOSED

112.605

Entry Price

113.500

112.000

97.470 -0.050 -0.05%

60.5

Pips

Loss

112.000

111.955

Exit Price

112.605

Entry Price

113.500

Fundamentals

The dollar took a roller-coaster ride from European Market to the American Market on Thursday, intraday decline of around 0.6%, with a low point of 112.165 at one point, giving back almost all of the previous session's gains, before rebounding quickly to recover all of its losses and close slightly down 0.05%.

The market saw a wave of a relief rally as the announcement of the resignation of British Prime Minister Truss triggered market turmoil. A glimpse of this can be seen in the trend of the pound, which moved higher in the short term after Truss confirmed her resignation. But this was only temporary because, despite Truss's resignation, the " chaos " she left behind was not optimistic.

The reason why Truss' economic growth plan has had such bad results is that it will further worsen the UK's fiscal balance, which means that the future debt burden will grow, eventually leading to a fall in bond prices, and the pound is essentially a liability of the Bank of England (except that the fiat currency system cannot be exchanged for gold). Therefore, the devaluation of the British pound is essentially a devaluation of the debt, and the national debt of the UK is nothing more than a forward pound.

Therefore, for UK authorities, there are two options.

The monetary authorities yield to persuasion and continue to ease, providing support for the fiscal issuance of debt at the cost of potentially high inflation and inflationary expectations, plus a significant devaluation of the local currency and the associated financial stability risks.

While the central bank's independence is preserved as the fiscal and administrative authorities yield, the debt market may likewise be under pressure after the central bank stops tapering its asset purchases, which could impact future new debt issuance and thus create the potential for default. Because new debt cannot be issued, old debt cannot be repaid.

The terminal point of both paths is similar, as inflation and the inability to roll over existing debt point to a debt default, except that one is implicit and the other is explicit.

Although Truss has resigned, it is not assumed that the UK's debt risk has disappeared, and no matter who succeeds Truss as Prime Minister, they may have to tighten fiscal policy in the medium-term budgetary plan rather than just reversing the previous easing to prove their fiscal restraint to financial markets. Hyperinflation and rising interest rates have changed the game for politicians, narrowing their room for manoeuvre. If the UK government cannot satisfy the needs, the investors will abandon government bonds, thus sharply increasing their borrowing costs.

Meanwhile, in the last four months alone, the UK has changed four Chancellors of the Exchequer, three Home Secretaries and two Prime Ministers, which is typical of political instability.

As a result, yesterday’s USD trend was a good reflection of the changing market conditions. The market "breathed a long sigh of relief" when Truss resigned, and the troublemaker was finally gone, with the British pound rising and the dollar falling. Although she left, the UK debt problem, the UK bond market problem, political instability and other issues have created a sense of worry in the market, which supported the dollar to rise again.

It is to be noted that yesterday the market pushed up expectations of the Fed's Terminal Interest Rate further above 5.00%, which is expected to happen in March or May next year, the first time since the current round of rate hikes. In other words, the USD is still supported by rate hike expectations at the moment, and that expectation has become even stronger.

Technical Analysis

In the 4-hour chart, after some " torment ", the dollar is currently back again before yesterday's decline, the temporary fall below 112.906, below the crucial support for the Fibonacci Analysis, which is the 50.0% (112.372); this line is exceptionally vital, once it stands firmly below this line, the dollar will have a deep retracement of the conditions. Although the previous few trading days have fallen below this line but did not stand firm, it can only be considered a false break. The indicators, Stoch, DMI, and Ichimoku table, all indicate that the dollar will fall in the short term, so you can wait to do more after the fall. USDX: Expectations of a Rate Hike are Rising Again and the USD Will Continue to Rise_1

USDX: Expectations of a Rate Hike are Rising Again and the USD Will Continue to Rise_1

Trading Recommendations

Trading direction: long

Entry price: 112.605

Target price: 113.500

Stop loss: 112.00

Support: 112.605, 112.372, 111.853

Resistance: 112.906, 113.500, 113.943

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