Trade Ideas: USD

The pullback in the US dollar was relatively limited after FOMC left interest rate unchanged and sounded more dovish than expected. While the greenback tumbled broadly through the 95 handle, it staged a solid recovery back above the level on Monday. 

US Federal Reserve
Source: Bloomberg

Despite the extended FOMC pause, the near-term outlook in dollar is not really turning bearish. Fed officials’ remarked, including San Francisco Fed President John Williams and St Louis Fed President James Bullard, over the weekend reinforced the idea that the Fed will raise rates at least once this year. There is also the matter of credibility on their part. As I argued previously, a symbolic 12.5 basis point hike will go a long way to protect their integrity.

To recap, the FOMC kept policy rate at 0.00-0.25%, while the accompanying statement showed that the Fed is concerned over the global developments and recent financial market volatility. In the latest dot plot graph, there were fewer members anticipating rate hike this year, and even one member leaning towards a cut to negative interest rate.

The dollar index fell as low as 94.06 but the short candlestick suggested that the struggle between buyers and sellers was intense. This means the downside momentum lacked conviction. As such, the fall from 96.61 could be a corrective move. We would focus on the 100-day moving average at 95.90, where a break would strengthen the case for a rebound from the 24 August lows of 92.62 back to the resistance level of around 98.00. On the downside, I continue to see strong support from the 92.62 low.

The corrective structure could affect the major dollar pairs. EUR/USD can’t seemed to hold gains above 1.14. Although there are expectations that the unwinding of carry trade in EUR pairs will support the euro, a resurgent USD would shatter that support. A break of 1.1214 could send the pair through 1.1090 support.

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AUD/USD also looks vulnerable. After plunging through the 0.7200 on Black Monday, 24 August, the pair struggled to regain the level, with the 23.6% retracement level of the 0.8164 to 0.6909 at 0.7205 blocking the rebound.

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USD/JPY is bounded within 118.55-121.74, maintaining a continuation pattern. A break of 121.74 resistance will pave the way for more upside towards 124-125 region.

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The outlook of US dollar is not overly bearish, and the relatively shallow dip post-FOMC is indicative of an opportunity to long dollar.

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