USDX: Is the USD Expected to Complete the Standard "Five Sub-Waves Rising" Structure?

Inflation and Recession Remarks of Officials Forex Market

Summary:

After the Federal Reserve chairman gave testimony in the Senate, the U.S Dollar Index (USDX) tested close to its highest level since early December of 106.00. For now, volatility should remain high and the risk balance in the market is expected to continue to tilt upwards. The focus of today's market will be on testimony 2.0 (the chairman of the Fed testifies in the House of Representatives). Meanwhile, the U.S. ADP employment change in February will be seen as a new driver.

Buy USDX

End Time

CLOSED

105.722

ENTRY PRICE

107.120

TGT PRICE

104.000

SL PRICE

102.498 -0.310 -0.30%

1722

Points

Loss

104.000

SL PRICE

103.998

CLOSING

105.722

ENTRY PRICE

107.120

TGT PRICE

Fundamentals

Fed chairman Powell successfully impacted the market in yesterday's Senate testimony. Powell not only said that the policy interest rate will eventually reach a higher peak when the economic performance is better than expected, but he also said that if the data proved this, he was willing to reassess the acceleration of the rate hike and return to the 50-basis-point increment.

It is worth noting that Powell stressed that "so far, there is little sign of deflation in the core service categories excluding housing", which indicates that the Fed is worried about the potential inflationary pressure. Powell also said a weaker labor market was needed, and although wage growth had slowed slightly in recent months, it was still uncomfortably high relative to the trend growth in productivity and the 2% inflation target.

Although Powell's semi-annual testimony almost repeated the previous repeated, the market still responded strongly, and there was a large sell-off in financial markets. As the market now prefers a 50-basis-point rate hike in March to the 25-basis-point rate hike that was deemed finalized a few weeks ago.

The market currently expects policy interest rates to peak at around 5.60% later this year. The slope between 10-year and 2-year Treasury Securities yields has now reversed by more than -100 basis points, the highest level since 1981, underscoring the continued sharp decline in bond markets.

The testimony of U.S. Federal Reserve Chairman Powell on Tuesday showed that it is risky to bet that the USD has peaked. Powell said that the terminal interest rate may eventually be higher than previously expected, and the pace of interest rate increase may be accelerated, suggesting that the Fed may reopen the door to a 50-basis-point rate hike. This is a reminder to investors.

As Fed officials enter a period of silence starting on Saturday, U.S. data releases in the next few trading days will be extremely important for the short end of the USD curve, as this could shape the Fed's trajectory. While Friday's non-farm payrolls naturally became a bright spot, Powell's testimony 2.0 later today, U.S. ADP jobs for February, and JOLTS job vacancy data could also prove to be extremely important.

The market currently expects ADP jobs to increase by 195,000 in February, up from 106,000 in January. Powell will then give testimony. If the ADP report shows private sector employment growth of more than 200,000, it will reaffirm the prospect of "high-interest rates for a longer period", supporting the USD and depressing the U.S. Treasury Securities. But the data will only put pressure on expectations if they fall into a shrinking range. The negative employment growth may benefit the stock market and emerging market currencies. Admittedly, the near-expected data released on Wednesday may be ignored by investors, who may still be digesting Powell's remarks and focusing on Friday's non-farm payrolls data, waiting to see the February and January data corrections.

USDX: Is the USD Expected to Complete the Standard "Five Sub-Waves Rising" Structure?_1

Technical Analysis

The USDX hovered around its December 2022 high, with the Asian session continuing to rise to a daily high of 105.90 on Wednesday. As we said before, betting that the USD has peaked is risky.

The USDX closed yesterday below the 50% Fibonacci retracement of 110.9-108.81, the third round of downward adjustments after pushing the USD to open a major adjustment in early December. However, after yesterday's sharp rise in prices, they stagnated at that level; So, will the USD stop after rising sharply from the bottom of 108.81? We do not think so.

Judging from the wave pattern cycle, solid Wave 2 and Wave 4 are the key factors to promote the formation of the 5 sub-waves. Although the period is relatively long, from the morphological structure, the 4th wave often moves in a triangular adjustment pattern. (The figure meets our expectations)

Overall, although the period of Wave 3 is relatively prolonged and some of the rising momenta are consumed, from the structural point of view, solid Wave 2 and Wave 4 are expected to promote the formation of the structure of 5 sub-waves. It is recommended to buy in at the lows.

Trading Recommendations

Trading direction: Long

Entry price: 105.37

Target price: 107.12

Stop loss: 104.00

Deadline: 2022-03-22 23:55:00

Support: 105.37, 104.72, 104.12

Resistance: 105.37, 105.92, 106.66

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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.

Rank

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540

Win Rate

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P/L Ratio

0.58

Focus on

WTI, XAUUSD, USDCAD

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USDX: Is the USD Expected to Complete the Standard "Five Sub-Waves Rising" Structure?

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