US10Y Pullback Introduces Possibility of New Paradigm
Introduction
Further to our previous article, the US10Y has failed to break through its neckline. I.e, the inverse head and shoulders has not been completed. An inverse head and shoulders is a reversal pattern and if completed suggests higher yields ahead. Thus, the failure to complete proposes the potential for a different paradigm. Below, we have a reference trough followed by a reference peak. Thereafter, a higher trough followed by a lower peak chart as the second reference. This introduces a sense of ambiguity in terms of peak and trough analysis. Let's consider two different scenarios.
Source: www.tradingview.com
Past Performance: Past Performance is not an indicator of future results.
Higher Rate Scenario
The higher rate scenario draws heavily on the Fed's hawkish pivot. On Tuesday, Fed Chair Powell, testifying in front of the Senate Banking Committee, said that it is time to retire the word "transitory" in describing inflation. The Fed Chair also said that it would be appropriate to consider speeding up the tapering of the Fed's asset purchases program. This will then set the path for rate hikes and the dot plots have progressively been getting more hawkish through the year. The next Fed statement on 15 December, will include a revised dot plot.
In this environment, a higher trough followed by a higher peak makes sense. The US10Y effectively adjusts to the higher nominal rates. Incidentally, this scenario will also complete the inverse head and shoulders pattern.
Source: www.tradingview.com
Past Performance: Past Performance is not an indicator of future results.
Lower Rate Scenario
The lower rate environment is harder to justify. Technically it is using the lower peak as a platform for a lower trough. The emergence of the Omicron variant was the catalyst for the lower peak and a lower trough would suggest that the emerging news regarding Omicron is not good. Ie, severe disruptions to the global recovery, which in turn would halt the Fed's monetary policy plans. In this scenario, the Fed is not able to tighten because monetary stimulus is still needed to support economic shocks caused by the new variant. In our view, this scenario is less probable than the rate hike scenario.
Source: www.tradingview.com
Past Performance: Past Performance is not an indicator of future results.
Conclusion
The US10Y bottoming pattern did not complete. The emergence of the Omicron variant has made markets more cautious. Two scenarios are presented above. The first regards rate hikes and the second regards lower rates. In our view, once news regarding Omicron is discounted into the market,as it emerges, the higher rate scenario is more probable. However, caution is certainly warranted.
Russell Shor
Senior Market Strategist
Russell Shor is a Senior Market Strategist at FXCM, having been promoted to the role in 2025 in recognition of his depth of insight and consistent delivery of high-impact market analysis. He originally joined FXCM in October 2017 as a Senior Market Specialist.
Russell holds an Honours Degree in Economics from the University of South Africa, is a certified FMVA®, and a full member of the Society of Technical Analysts (UK). With over 20 years of experience in financial markets, his work is renowned for its clarity, precision, and strategic value across asset classes.
Any opinions, news, research, analyses, prices, other information, or links to third-party sites contained on this website are provided on an "as-is" basis, as general market commentary and do not constitute investment advice. The market commentary has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and it is therefore not subject to any prohibition on dealing ahead of dissemination. Although this commentary is not produced by an independent source, FXCM takes all sufficient steps to eliminate or prevent any conflicts of interests arising out of the production and dissemination of this communication. The employees of FXCM commit to acting in the clients' best interests and represent their views without misleading, deceiving, or otherwise impairing the clients' ability to make informed investment decisions. For more information about the FXCM's internal organizational and administrative arrangements for the prevention of conflicts, please refer to the Firms' Managing Conflicts Policy. Please ensure that you read and understand our Full Disclaimer and Liability provision concerning the foregoing Information, which can be accessed here.