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Unveil Reasons of USD Bounced up
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The US Dollar Index bounced up by around 1% after releasing the minute of Federal Reserve Board on 19 Aug, breaking the record high since this March. The minute shows that the board tends to adopt more dovish approach in monetary policy. Yet, Why did the US Dollar Index make such a big bounce-up, driving those non-US dollar or even precious metal down？To get more news about WikiFX, you can visit wikifx official website.
According to the minute of Federal Reserve Board, some of the committee members of FOMC agreed to adopt the further easing monetary policy to cope with the negative impact bought by COVID-19; however, traders were disappointed and started to have short covering of USD immediately, driving USD rise a lot.
I believe traders have already predicted and short USD ahead of releasing of minutes; and, they short cover the USD afterwards. It perfectly demonstrates the famous Wall Street‘s buying strategy – “Buy on rumor, sell on fact”. Meantime, the minute also reflects that the officers of the Board won’t set the upper limit or target return for US bonds to secure the position of USD. It drives those “extreme” dovish party disappointed and shows Federal Reserve Board has no further measures on easing monetary policy. Thats why some may interpret as the start of hawk signal instead of dove.
I agree the Federal Reserve Board intends to adopt more dovish approach to pave the way for adopting further easing monetary policy in future. Since the minute keeps on telling negative towards economy, it drove both DJ index and Nasdaq index drop simultaneously after hitting the record high. With the divergence works between USD and stock; USD index, therefore, increases drastically after releasing of minutes.
Many has talked about the huge short covering of USD, which showed the signal of bouncing up after touching the bottom. Whilst some said this is merely a technical adjustment and will have further drop afterwards. I do think the probability of both scenarios are equal; yet I realize USD dose not have much room for further drop, expecting a strong supporting level around 91.90. Two focusing events may affect the trend of USD - i/ the economic platforms of democratic party proposed by US president candidates Joe Biden and Kamala Devi Harris; ii/ the announcement of Jackson Hole in the Central Bank annual meeting and the market expectation - the new and innovative strategy of easing monetary policy by Powell, the chairman of Federal Reserve Board. If it turns negative and has no new ideas, USD index will be expected to boost up again.
Technically, USD has a strong resistance level at around 94, with 3 times strong selling signal recently, making USD index hard to have another breakthrough. It is estimated to be positive if USD index breaks the 94 level and takes this as the USD reference point.