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Volatility Picking Up in FX Markets - MKT Call: Macro

Volatility Picking Up in FX Markets - MKT Call: Macro

Christopher Vecchio, CFA, Senior Strategist
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MKT CALL: MACRO OVERVIEW:

  • Fed rate hikes continue to climb, particularly after Fed Chair Jerome Powell and Fed Governor Lael Brainard focused on fighting inflation during their nomination remarks.
  • Gold prices have been clobbered as Fed rate hike odds have risen, and now a false breakout scenario is in play.
  • The Turkish Lira is melting down for a variety of reasons – none of which can be resolved easily.

A New Week Brings New Dollar Highs

In this week’s edition of MKT Call: Macro (formerly The Macro Setup), we talked about how the Federal Reserve’s stance on fighting hot US inflation rates may have shifted, why the reversal in US stock markets and gold prices are rooted in the same catalyst, and how geopolitical and policy concerns are impacting both the Euro and the Turkish Lira.

If you rewind the clock to the November Fed meeting, Fed Chair Jerome Powell mentioned that the rate of tapering QE was only set in stone for November and December, at a pace of $15B/month. Implicitly, he suggested that tapering could increase in early-2022 if data warranted as much. In his remarks yesterday after being renominated for a second term as Fed Chair, Powell, like Fed Governor Lael Brainard – who was nominated for Vice Chair – focused on fighting inflation as a top priority.

Markets are thus behaving as if not only will the Fed accelerate its rate of stimulus winddown, but will also move quicker on interest rates than previously anticipated. At the end of last week, Fed funds futures were discounting an 81% chance of a 25-bps rate hike by June 2022; those odds have now risen to 97%.

The prospect of faster tapering and a rate hike sooner than otherwise expected is proving to be beneficial for the US Dollar – but hazardous for both US equity markets and gold prices. Breadth has been poor in US stock markets over the past week or so, and the latest turn in speculation around the Fed is a detrimental development near-term. For gold prices, it appears that a false bullish breakout occurred, putting into focus a move to the otherside of their multi-month consolidation.

*For commentary from Dan Nathan, Guy Adami, and myself on the US Dollar (via the DXY Index), the US S&P 500, gold prices, Bitcoin, the Turkish Lira, among others, please watch the video embedded at the top of this article.

CHARTS OF THE WEEK

Eurodollar Futures Contract Spread (DECEMBER 2021-DECEMBER 2023) [ORANGE], US 2s5s10s Butterfly [BLUE], DXY Index [WHITE]: Daily Chart (JANUARY 2021 to NOVEMBER 2021) (Chart 1)

Volatility Picking Up in FX Markets - MKT Call: Macro

GOLD PRICE TECHNICAL ANALYSIS: DAILY CHART (MAY 2019 TO NOVEMBER 2021) (CHART 2)

Volatility Picking Up in FX Markets - MKT Call: Macro

EUR/USD RATE TECHNICAL ANALYSIS: MONTHLY CHART (NOVEMBER 2007 TO NOVEMBER 2021) (CHART 3)

Volatility Picking Up in FX Markets - MKT Call: Macro

--- Written by Christopher Vecchio, CFA, Senior Strategist

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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