The greenback is the market's safe haven in the current macroeconomic environment. Many variables are in play, and their complexities drive a risk-off sentiment as the narrative oscillates between inflation and recession. Market participants are confused and, as such, have decided that cash is king. The USDOLLAR's stochastic has pushed into its upper quintile (green rectangle), and as long as it maintains, the buck will stay bid. This bullishness persists even though, on a longer-term basis, the USDOLLAR is looking top-heavy – the market is more comfortable with the devil they know.
The uncertainties stem from stagflationary pressures from exogenous supply shocks due to the Russian invasion of Ukraine, lockdown conditions in China (and the threat of renewed lockdown) and supply chain disruptions. Add to this the rampant demand-side inflation from unconventional and ultra-loose policies, and one finds that there are few places to hide as markets reel. As a result, the majors have tanked against the dollar today as risk markets sell off. However, the complexities continue as monetary authorities tighten and participants ponders the potential fallout from another round of unconventional policy – quantitative tightening.
The market expects the Fed to deliver another 75bps hike this month and currently expects 50bps in September. Given the cumulative addition of 125bps, it is highly likely that the 2/10s yield curve inverts (black rectangle, lower chart). Whilst not guaranteeing a recession, all recessions begin with a yield curve inversion. In effect, the market is suggesting a slow down and lower interest rates in the future to compensate.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation of Technical Analysts. He is a full member of the Society of Technical Analysts in the United Kingdom and combined with his over 20 years of financial markets experience provides resources of a high standard and quality. Russell analyses the financial markets from both a fundamental and technical view and emphasises prudent risk management and good reward-to-risk ratios when trading.