Sowed the seeds of it's own reversal
As the inflation normalization process continues at the end of the Fed hiking cycle, with low market stress and relatively tight credit spreads, investors may continue to embrace a Goldilocks risk-friendly market, especially if the MOVE index rolls over. In addition, macro indicators have worsened, and we are bound to get a critical economic signal for the Fed rate path from here. There's no need to flip coins; the Fed is done, and we are back to counting economic quarters until the first Fed cut.
As brittle as it is in its simplicity, with yields ratcheting higher well beyond " fair value," it will tighten financial conditions significantly. Indeed, this is a roundabout way of saying the current bond market selloff has sowed the seeds of its own reversal. The Fed likes this, and curve normalization is something they have been trying to achieve for years.
Still, for the dollar to turn tail, a convincing circle of weaker US dollar catalysts via better EU economic data and improving economic performance in China must happen; unfortunately for currency markets, it is still challenging to completely square that circle at this stage even with the Fed on pause through 2024.
Author
Stephen Innes
SPI Asset Management
With more than 25 years of experience, Stephen has a deep-seated knowledge of G10 and Asian currency markets as well as precious metal and oil markets.
