Wait for Non-farm Payrolls Guidance on Rate Hike Expectations while USD Fluctuates in the Short Term

Summary:

The slowdown in rate hike expectations was removed by Fed officials and data, but there is a risk of renewed changes in market expectations as the non-farm payrolls approach.

BUY USDX

EXP

EXPIRED

110.735

Entry Price

111.673

110.100

99.940 +0.100 +0.10%

Pips

EXPIRED

110.100

112.335

Exit Price

110.735

Entry Price

111.673

Fundamentals

After two consecutive sessions of declines, the USD rebounded from recent weakness on Wednesday, after approaching a two-week low of 109.818, the USD used this as support for a strong rally, with an intraday high touching 111.560, recovering the vast majority of Tuesday's losses, before falling back slightly from the highs to close 0.95% higher.

The main driver of the USD's rise is still market expectations, after the market's expectations that the Fed will slow down interest rate hikes gradually heated up, and bets on the terminal rate also fell back to below 4.5%, after having been over 4.6%. But with yesterday's speech by two Fed officials, this expectation was smashed.

San Francisco Fed President Daly stressed Wednesday that the Fed is committed to curbing inflation through further rate hikes, and she also said that if the economy starts to have problems, the Fed will not just move forward. But now the economy is running well and the market is functioning normally. The Fed is expected to raise rates by 75 basis points at its next meeting to ease price pressures. Price pressures are higher and more persistent than policymakers expected.

Bostic said that despite the "glimmer of hope" in the recent data, he would like to convey that we are still mired in the inflation dilemma and have yet to get out of it. The Fed's target for the federal funds rate needs to be raised to about 4.5% by the end of the year. Interest rates are then limited to that level long enough to assess the direction of the economy until inflation returns to the target level. There has been considerable speculation that if economic activity slows down and inflation starts to fall, the Fed will start to cut interest rates in 2023. He mentioned it is not so fast. We should not allow the appearance of (economic) weakness to hinder our efforts to reduce inflation. We must remain vigilant because the fight against inflation is still at an early stage.

If combined with the market's current expectations, it can be seen that the two officials' speeches are very targeted, which is undoubtedly suggesting that the market is "jumping the gun" over the line. And from yesterday's trend of the USD, the market such expectations have been moderated.

In addition, the ISM Service PMI and ADP also reflected some problems in the data released yesterday. The PMI for the services sector slowed modestly, but employment rose sharply, with the measure of corporate input prices falling to their lowest level in more than a year and a half. The interest rate hike was aimed at slowing the economy and labor demand to fight inflation, but the data showed that the services sector in the U.S. economy seemed too resilient to have the kind of slowdown the Fed wanted. This suggests that the economy has potential strength despite higher interest rates. The ADP data, on the other hand, suggests that although labor demand may slow, the job market remains strong.

These two data also show that the Fed's current "work" is far from completion, and they still need to raise interest rates. CME's FedWatch Tool shows that after the release of ADP data, the probability of the Fed raising rates in November by 75 basis points rose to 69.2%, which is the best proof.

As the non-farm payrolls approach, there is a risk that market expectations will change again. If the non-farm payrolls are strong, it indicates that the labor market remains vibrant and the Fed still has room for aggressive rate hikes, which will consolidate expectations for rate hikes. Conversely, it will reinforce expectations for slower rate hikes.

USDX: Wait for Non-farm Payrolls Guidance on Rate Hike Expectations while USD Fluctuates in the Short Term_1

Technical Analysis

In the 4H timeframe, the USD was supported by a low of 109.926 yesterday and launched a strong rally, showing a V-shaped reversal pattern, with highs held up by a narrow oscillation range of 112.605 - 111.673. The USD is supported in the short term by the 61.8% Fibonacci retracement (110.735), temporarily blocked by 111.300, which was the last support when the USD retreated from the high of 120 in 2001-02. Overall, the USD is still in retracement (down). Yesterday's strong rally only served to stop the decline. If the USD wants to open a new round of uptrend in the short term, it needs to break 112.343. In terms of the indicators, Stoch has approached the oversold zone, indicating that the USD has the possibility of an uptrend in the short term. In DMI, ADX is slightly higher than the previous value, indicating that the USD's upward momentum has increased, but -DI is below and at 9.5, meaning that the USD has the possibility of falling in the short term. In the Ichimoku chart, the turning line shows signs of going up through the baseline, but the candlestick where the current price is located has not yet reached the upward requirement and will go down in the short term.

Trading Recommendations

Trading direction: Long

Entry price: 110.735

Target price: 111.673

Stop loss: 110.100

Support: 110.735, 110.39, 109.926

Resistance: 111.300, 111.673, 112.335

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