The US dollar is at the highest levels since the dawn of the pandemic and has surged higher today.
What’s happening?
In short, the market is no longer convinced that global central banks can tame inflation without a major hit to growth. Maybe that’s not a recession but it’s a much slower growth paradigm than assumed.
Eight months from now, the Fed funds futures market is priced for 2.75-3.00% overnight rates after a series of at least three 50 bps hikes to start. The overnight rate hasn’t been that high since 2007 and we just don’t know what the economy will look like when it gets there.
The market is saying that global central banks are behind the curve and will need to over-tighten to halt inflation.
„We are walking a very tight line between tackling inflation and the output effects of the real income shock, and the risk that could create a recession,“ said Bank of England Governor Andrew Bailey today.
Yesterday, Powell had this to say:
Our goal is to use our tools to get demand and supply back in synch…and
do so without a slowdown that amounts to a recession,“ he said. „It
is going to be very challenging.“
Not just inflation
Previously, the market was convinced that central banks had plenty of latitude to hike rates at a gradual pace to cool inflation but two things have changed in 2022.
1) The Ukraine war catalyzed commodity inflation
2) China is on lockdown, snarling supply chains again
The market put on the rose-coloured glasses on both fronts for a time but it’s now clear that both aren’t going anywhere. Plus, with inflation continuing to ramp up and central banks now taking a more-hawkish tilt, the risks have hit a point that’s intolerable for the bulls.
Combine that with the irrational exuberance in stay-at-home tech stocks during the pandemic and the resulting bubble burst and it’s a minefield out there.
Ultimately, what’s made me have a rethink is the performance of commodity producers this week. Commodity prices have largely held up this week but producers are being rocked.
Alcoa reported good earnings this week and the commentary in the conference call was overwhelmingly upbeat. Yet here’s the chart:

That’s a 23% fall this week.
It’s not an isolated case either. Freeport McMoran is down 18% and others to a less extent.
If I had to name the watershed it would be the latest IMF global growth forecasts released this week. Those sets of numbers generally tell people what they already know but this time the report seemed to galvanize sentiment. The 2022 global GDP forecast was ratcheted down to 3.6% from 4.4%.
If you look at those forecasts as more of a snapshot of the consensus a month ago, then layer in faster rate hike scenarios since then — you can easily get below 3%. For instance, China was only lowered to 4.4% from 4.8%. Given the covid state-of-play, that’s optimistic.
In addition, here’s a look at 2023 forecasts. If you’re concerned about higher rates and a deeper slowdown, there isn’t much room for error:

UK +1.2%
Italy +1.7%
Eurozone +2.3%
US +2.4%

What does it mean for the currency market?
The pictures tell the story. GBP/USD has clung to 1.30 as important support since mid-March. It crashed through today to the lowest since October 2020.

The New Zealand dollar chart (which looks an awful lot like the Nasdaq) also crashed through the 61.8% retracement of the March rally. It still has some breathing room before the January low but today’s price action is a sign of things to come unless the market mood reverses.

There is still plenty to like with commodity currencies: I think this will be a bullish decade for natural resources due to underinvestment and the green transition. But the rallies are likely to go ‚on pause‘ until we see global central bank hawkishness dialed back.
When will central banks get off the brakes?
That’s the big question.
I can make a compelling case that we’ve already priced in maximum hawkishness. A 2.71% return in two-year Treasury is a decent yield in a time of uncertainty. 
I think the Fed also underestimates just how much leverage is out there. We saw it at the start of the pandemic when bonds imploded before the Fed started buying in unlimited amounts. Financial markets are built on a shaky foundation of wildly over-leveraged trades.
The basket of things that work at a 3% overnight rate compared to 0.1% is infinitely smaller. To get there will require some heavy unwinds and no one knows what that looks like. I fear that it isn’t pretty.
The Fed is going to announce an unwind of its balance sheet on May 4. They’ve already stopped net purchases.
It’s a good bet that Powell will see some turmoil in markets along with growth fears and try to dial back aggressive rate hike expectations so maybe that’s when the coast is clear. The Fed has been a great friend to markets for many years.
At the same time, inflation is a real problem and Fed comments suggest they’re running scared. Powell yesterday said the jobs market was ‚unsustainably hot‘ and that taming inflation was ‚absolutely essential‘.
„We have had an expectation that inflation would peak around this time
and come down over the course of the rest of the year and then further,“
Powell said. „These expectations have been disappointed in the
past…We are not going to count on help from supply side healing. We
are going to be raising rates.“
Watch the Canadian dollarOne currency that I’m particularly worried about in the context of higher rates is the Canadian dollar.The Canadian housing bubble is in the process of popping and the decline will be dramatic. At this point the bull case is that prices fall 20% and Canadians shrug it off because it was all found money anyway.What’s important to remember is that the Canadian and US housing markets have fundamentally diverged. Canadian prices are much higher but structurally, the housing market is also much more vulnerable. That’s because variable rate mortgages are highly popular and have grown even moreso as rates have risen. That means that the freshest money that bought homes at the highest prices is also most vulnerable to higher rates. There’s no room for error there. In addition, even fixed rates in Canada are only for five years so around 20% of those roll over every year and they’ll be resetting higher. In the US, the 30-year fixed is standard so the only real pain is on the new buyers and sellers. The absolute kicker is that it’s not really the Bank of Canada that sets the rates for Canada.Surely you think I jest but I’m serious. Canadian mortgage rates are set around the 5-year government of Canada note. The BOC has some impact on where that trades but the biggest determinant is where Fed funds are.In a nightmare scenario for the Canadian economy, the housing markets goes into a crash and even with the BOC dropping rates to zero, the Fed is still hiking or holding rates at a high level. Perhaps the BOC could counteract some of that with QE but the result would be a significantly weaker loonie.The odds of an outcome along those lines are growing.

Earlier USD/JPY rallied on a newswire headline that said:
‚BOJ must keep aggressive easing, even as the yen drops‘
Not so fast.
There’s been something of a correction now as a newswire reports that his comment about aggressive easing ‚wasn’t in the context of yen weakening‘.
That’s why USD/JPY has given some back.

Headlines:Sterling tumbles on break below 1.3000, what’s next?Yuan fall not letting up towards the end of the weekUS sounded like it will consider the idea of joint FX intervention with Japan – reportEurope PMI recap: Services sector rebound masks continued inflation surgeUK March retail sales -1.4% vs -0.3% m/m expectedLagarde said to told ECB policymakers to hold back on dissenting views, leaksGermany’s Scholz: I don’t see how a gas embargo on Russia would end the warMarkets:JPY leads, GBP lags on the dayEuropean equities lower; S&P 500 futures down 0.2%US 10-year yields flat at 2.916%Gold down 0.8% to $1,935.50WTI down 1.2% to $102.52Bitcoin down 0.3% to $40,535It’s shaping up to be a typical April day in trading today, with bond yields rising, the dollar rallying, and equities looking more sluggish. That has been the sort of familiar theme we have been seeing as of late and today is no different.European indices opened lower, having to play catch up to the late plunge in US stocks yesterday but the overall risk mood is rather soft in any case. In FX, I would say the recent drop in the yuan isn’t getting enough attention as it should but that tends to correlate with a more risk averse narrative and a stronger dollar. That is precisely what we’re seeing.The greenback is continuing its good form as of late with EUR/USD falling from 1.0840 to 1.0790 while GBP/USD took a plunge after poor UK retail sales data, falling from 1.3020 to 1.2865 before keeping near 1.2900.USD/JPY was steadier, though it saw a drop to 127.75 after more intervention talk by Japanese officials. The pair then recovered back to keep near flat levels now around 128.20-40.Meanwhile, commodity currencies struggled heavily amid the more dour risk mood. USD/CAD is up 0.7% to 1.2670 while AUD/USD is down 0.9% to test 0.7300 with its 200-day moving average nearby.Elsewhere, gold is continuing its struggle as price is declining further after having neared the $2,000 mark at the start of the week. Price is down 0.8% to $1,935 at the moment.

The latest opinion poll sees Macron winning with 56% of the vote, having widened that gap before the first round of elections on 10 April. And the fact that the lead is being consolidated shows that markets could perhaps breathe a little easier during this week.Don’t get me wrong. Politics these days are never certain. Le Pen could bring about an upset and if she does, the euro is going to be reeling from the election result surely.Considering the technical vulnerabilities in the single currency against the dollar below 1.0800, it leaves exposed a potential drop towards the March 2020 low @ 1.0635.As for a straightforward Macron victory, I don’t expect much upside for the euro in France retaining the status quo. There might be a bit of a relief push (though I wouldn’t expect much) but I think the play might be to fade that as long as the dollar continues to hold firmer elsewhere alongside higher bond yields in general.I mean, if a more hawkish ECB pricing isn’t enough to get the euro buoyed this week, I’m not sure what else will.

The dollar is the frontrunner on the session, alongside the yen, as we continue to see the same old themes play out before the weekend approaches.
Higher yields, stronger dollar, and more sluggish equities seems to be the name of the game in April and not much will change before the FOMC meeting on 4 May in my view.
EUR/USD is pinned down 0.3% to test 1.0800 again, though recent lows close to 1.0760 might provide some additional support for the pair for the time being. But the downside for the euro is that it is seen struggling despite markets pricing in a more hawkish ECB. I’d argue that there is still the propensity for the central bank to disappoint come July.
Meanwhile, the pound is in freefall after a break below 1.3000 in cable. The next key support is the 50.0 retracement level at 1.2830 and the pair is still holding down 1% around 1.2890 currently.
USD/JPY is keeping rather flattish around 128.30 but that belies the more back and forth action from earlier with dip buyers stepping in after the pair fell to a low of 127.75.
Elsewhere, the aussie and kiwi are also pinned lower with AUD/USD breaking below some key support levels:

The pair has fallen past the 50.0 retracement level of its swing higher this year @ 0.7315 and also broken the trendline support during that move. The 200-day moving average (blue line) @ 0.7293 is the next key support level to watch.

The offshore yuan weakened to 6.52 against the dollar today, the lowest level since July last year.
Chinese policymakers sort of disappointed on expectations for a LPR cut this week but they are making up for that in supporting the economy through other means. The evident weakening of the yuan is one of that.
The Chinese currency is set for its biggest weekly drop against the dollar since the early days of the pandemic. And allowing it to weaken past 6.50 sets the stage for added weakness until we start to see local authorities step in.
The previous „range“ that Chinese officials were comfortable with was around 6.30 to 6.40. We’re off now to figure out where exactly they’d be happy to see the currency hold next. The March 2021 high just above 6.58 will be one to watch as a break above that could hint at the PBOC wanting a much weaker currency to bolster exports.As mentioned as well a few days back, the move here is also one to be mindful about as it also helps to provide a tailwind for the dollar in general.

It is said that Lagarde has told policymakers to hold back on criticism and dissenting views on policy decisions for several days. The move comes as Lagarde is said to struggle with the vocal dissent from more hawkish members and persistent leaks about the internal debate within the governing council.The sources note that Lagarde has told policymakers to present the majority view after policy decisions – which are on Thursdays – and hold back on „personal“ views until the Monday after.The supposed guideline also calls for policymakers to not leak details of internal discussions to the press but these are informal directions so policymakers aren’t exactly obliged to follow them.The sources reporting also adds that Lagarde’s effort above is not really going down too well with some members. One of the sources stated that:“Do you want leaks? Because this is how you get them. If people can’t speak openly, they’ll still talk but using different channels.“Well, with surging inflation pressures, it is certainly making it easy for ECB hawks to keep sniping at the central bank’s decision and guidance these days. You can’t blame Lagarde for wanting to control the situation but I fear it will not win her any friends considering how diverse and at times divided the ECB can be on these views.In part, it is also to strengthen the decision and statement put out by the central bank on the day itself. I mean how many times have we seen one thing from the ECB decision only for „close sources“ to leak out a different story a couple of hours after that?

Headlines:ECB’s de Guindos: A rate hike is possible in July, will depend on dataECB’S Wunsch says policy rates could turn positive this yearECB’s Lagarde: Policy will depend on incoming dataBOJ Gov Kuroda says its desirable for forex rates to move stably, reflecting fundamentalsEurozone March final CPI +7.4% vs +7.5% y/y prelimFrance April business confidence 106 vs 107 priorChina commerce ministry says to roll out targeted measures to boost consumptionMarkets:EUR leads, NZD lags on the dayEuropean equities higher; S&P 500 futures up 0.9%US 10-year yields up 3.3 bps to 2.869%Gold down 0.8% to $1,941.50WTI up 1.0% to $103.21Bitcoin up 2.9% to $42,630The euro was the notable mover on the session as it got inspired by some added hawkish talk by ECB vice president Luis de Guindos, hinting at a potential rate hike in July.That saw EUR/USD move up from 1.0857 to 1.0936 before retreating to 1.0880 levels currently. There are large expiries at 1.0900-05 rolling off today helping to keep a lid on price action alongside key Fib levels pointed out here.The dollar is holding up decently, keeping above 128.00 against the yen while GBP/USD is down 0.2% to 1.3040. The aussie and kiwi are also slightly softer on the day but price movements in FX are still fairly narrow for the most part.The bond selling is continuing with Treasury yields keeping slightly higher across the curve. Meanwhile, equities are looking buoyed with US futures soaring after Tesla’s earnings was a blowout. The more positive mood is also buoying European indices on the day.Elsewhere, gold is seen struggling as it slumps to near two-week lows as price falls further after the rejection near $2,000 at the start of the week.

Inflation. Inflation. Inflation.That is number one topic in markets at the moment and we are not likely to see the focus shift before the next Fed policy meeting on 4 May.The bond market remains a key driver of trading sentiment, as evident with the somewhat parabolic rise in yen pairs since March trading. The price action there mimics the surge higher in bond yields during the period.All of this comes as inflation is rampaging higher and is putting central banks under the microscope.That said, there are certain quarters in the market that are coming around on the idea of ‚peak inflation‘. That may be something that could play out in the weeks/months ahead as central banks also adopt a similar view. If so, what comes next?It’s all about data at the end of the day and if inflation pressures are showing signs of slowing down, it could very well drive yields and the US dollar in the opposite direction. The greenback has benefited strongly from the market pricing in a rather aggressive Fed but the rates outlook may not be as bullish if ‚peak inflation‘ attaches a ceiling on policy action.Besides, can you say that the market isn’t quite prepared for 2.50% to 3.00% Fed funds rate now? Certainly not. Pretty much everyone is expecting such a trajectory in this cycle. As such, talk of ‚peak inflation‘ will present risks to that outlook and we could see some pushback to the recent market movements.But for now until 4 May, things aren’t likely to change. Central banks will dominate proceedings in the weeks ahead but let’s also not forget about month-end trading coming up next week.

Fibonacci retracements
levels are horizontal lines plotted on a chart using the corresponding tool
that display possible support and resistance levels. The levels are
based on the Fibonacci’s golden ratio, that is 1.618 and it can be used to
describe proportions of everything in nature, from atoms to complex patterns in
the universe like celestial bodies, therefore, many traders believe that these
numbers also have relevance in financial markets.

 

The
retracement levels are 23.6%, 38.2%, 61.8%, and 78.6%. While not officially a
Fibonacci ratio, 50% is also used. The indicator is useful because it can be
drawn between two significant price points, such as a swing high and a swing
low to pinpoint a possible entry on a pullback. In an uptrend you draw it from
the swing low to the swing high, while in a downtrend from the swing high to
the swing low. The tool will then display the levels between those two points.

 

 

The thing
that makes Fibonacci quite effective is because lots of traders use them and so
everyone expects others to act from Fibonacci levels making it almost a
self-fulfilling prophecy. Many traders also draw more Fibonacci levels from
different swings when they are confusing to get confluence.

 

Look for the
most obvious swings when drawing Fibonacci levels and try to get some
confluence with other technical concepts like support and resistance,
trendlines, indicators and so on. Fibonacci helps you to plot levels where a
retracement from the overall trend may bounce back giving you a trading
opportunity to enter or re-enter the market.

 

 

This article
was written by Giuseppe Dellamotta.