In early September, we discussed how the yield curve briefly turned negative. The yield curve we referenced was the difference between the US 10-year yield and the US 2-year yield. Why was this such a big deal? Because on the last 7 occasions, it led to a recession (however the recessions were 6-9 months later). At the time, we compared the price action of the inverted yield curve to the price action in WTI Crude oil from Q4 of 2019. We considered the possibility that after selling off and bottoming, the yield curve may form an Inverted Head and Shoulders pattern and a move back to the 61.8% Fibonacci retracement level of the entire move lower, just as WTI Crude oil had done in Q4 of 2019.
Source: Tradingview, FOREX.com
A month and a half later, the US yield curve has reached the 61.8% Fibonacci retracement level, met the target level for the inverted head and shoulders pattern, and put in a bearish engulfing pattern yesterday on the daily chart.
Source: Tradingview, FOREX.com
Where does the yield curve go from here? Let’s first look at the daily WTI crude chart, which had a false price breakout above the 61.8% Fibonaccci retracement level and pulled back, forming a wide consolidation channel between 50.50 and 63.80. Today, 6 months after the start of the channel, WTI Crude oil is still trading within that channel, mean reverting around the 200 Day Moving Average. However, price did test the lows 4 times.
Source: Tradingview, FOREX.com
If we focus on the price action in WTI Crude Oil as it pulled back after reaching the highs on April 23rd at 66.48, we see that price pulled back to the 61.8% Fibonacci retracement level from the lows on December 24th to the highs on April 23rd and put in a double bottom. This low defined the bottom of the channel, within which price currently trades.
Source: Tradingview, FOREX.com
Now, if we theorize that the US Yield Curve will act in the same manner as WTI Crude oil, we can look for the US yield curve to pull back to the 61.8% Fibonacci retracement level from the August 27th lows to yesterday’s highs, which is 0.038.
Source: Tradingview, FOREX.com
If the US yield curve does pull back to that level, what happens next? Will it head into negative territory again?
Let’s take one step at a time….but keep an eye on WTI Crude Oil for clues!
Risk Warning Notice Foreign Exchange and CFD trading are high risk and not suitable for everyone. You should carefully consider your investment objectives, level of experience and risk appetite before making a decision to trade with us. Most importantly, do not invest money you cannot afford to lose. There is considerable exposure to risk in any off-exchange transaction, including, but not limited to, leverage, creditworthiness, limited regulatory protection and market volatility that may substantially affect the price, or liquidity of the markets that you are trading. Margin and leverage To open a leveraged CFD or forex trade you will need to deposit money with us as margin. Margin is typically a relatively small proportion of the overall contract value. For example a contract trading on leverage of 100:1 will require margin of just 1% of the contract value. This means that a small price movement in the underlying will result in large movement in the value of your trade – this can work in your favour, or result in substantial losses. Your may lose your initial deposit and be required to deposit additional margin in order to maintain your position. If you fail to meet any margin requirement your position will be liquidated and you will be responsible for any resulting losses.
Recommended Content
Editors’ Picks
EUR/USD holds above 1.0700 ahead of key US data
EUR/USD trades in a tight range above 1.0700 in the early European session on Friday. The US Dollar struggles to gather strength ahead of key PCE Price Index data, the Fed's preferred gauge of inflation, and helps the pair hold its ground.
USD/JPY stays above 156.00 after BoJ Governor Ueda's comments
USD/JPY holds above 156.00 after surging above this level with the initial reaction to the Bank of Japan's decision to leave the policy settings unchanged. BoJ Governor said weak Yen was not impacting prices but added that they will watch FX developments closely.
Gold price oscillates in a range as the focus remains glued to the US PCE Price Index
Gold price struggles to attract any meaningful buyers amid the emergence of fresh USD buying. Bets that the Fed will keep rates higher for longer amid sticky inflation help revive the USD demand.
Sei Price Prediction: SEI is in the zone of interest after a 10% leap
Sei price has been in recovery mode for almost ten days now, following a fall of almost 65% beginning in mid-March. While the SEI bulls continue to show strength, the uptrend could prove premature as massive bearish sentiment hovers above the altcoin’s price.
US core PCE inflation set to signal firm price pressures as markets delay Federal Reserve rate cut bets
The core PCE Price Index, which excludes volatile food and energy prices, is seen as the more influential measure of inflation in terms of Fed positioning. The index is forecast to rise 0.3% on a monthly basis in March, matching February’s increase.