It will not happen today or this month, but there is a growing sense of foreboding regarding equity markets. After the free cash run of the past two years valuations hit unsustainable levels. We have had corrections before, but stocks are so far only gradually pricing in what is the predominant risk for the Untied States: An aggressive rate hike cycle as it enters recession? The prospect of rampant inflation that demands significant and aggressive hikes, while at the same time the global economy and the US enter a slow-down created as a hangover result of the massive stimulus of recent years, and added to by on-going supply chain disruption and now the conflict in Ukraine, do not a favourable investment environment make. Fresh record highs were seen in New York in the first week of the year's trading. Ever since then it has been quite the rollercoaster, but with a persistent heavy bias. There was talk of war, but few really expected it to happen. Now that it is here, the ramifications for Europe and the global economy are far worse than anyone could have predicted. Energy prices look set to stay stubbornly high for the foreseeable future, and food availability and pricing has become a major issue. For the European economy, it really is about the blow-back effects of sanctions and in particular the impact on consumer and business sentiment. ‘Caution' will be the dominant response through the rest of this year. The European slowing will also flow through to the US economy and dampen equity market sentiment. If the US were to slip into some form of recession as well, alongside a permanently slowed China, one would be left asking, just why are stock prices so high? Do I really need to buy more stocks near record levels with rates going up, a war in Europe and a slowing global economy? The US stock market can most definitely fall a further 20% should the talk of recession start to look rather likely. The “great wash” of money is about to be unwound and the persistent bullish sentiment merely for the sake of it, could well leave equities as the Emperor with no clothes for 2022.

Those who’ve been long the US dollar index (DXY) since the middle of last year have done well for themselves. The DXY has gained 12% from its January 2021 swing low of 89.21 to trade close to 99.75 at the time of writing. Making similar gains from current levels will undoubtedly prove more challenging. Traders should be factoring this into their risk-reward assessments going forward for several reasons. First and foremost, as the DXY moves higher it’s likely to meet fierce resistance between the 100-103 range. In March 2020, dollar sellers were quick to step into the market when price attempted to breach the 103 level. Buyers may meet similar selling pressure on any re-attempt at these levels. Even more selling pressure is likely to arise toward the 103.8 level. Secondly, from a market structure perspective the uptrend in the DXY is a lot more recent than appears to the naked eye. The 94.74 September 2020 swing high of the previous downtrend was only breached in November last year. This alone would not be concerning if it weren’t for a bit of RSI divergence between the latest two swing highs raises questions about further momentum. Lastly, if indeed 99.418 represents the last true previous swing high and 97.685 the low in March, then traders are potentially facing a right-angled ascending broadening wedge pattern. Such a pattern adds a bit of ambiguity about further direction. All that said, the DXY is clearly in an uptrend and the long US dollar positioning that drove the DXY higher earlier in the year has faded. So, there is still scope for a further rise in price. Nevertheless, traders should certainly be taking note of some of the red flags being thrown by the latest leg higher in the DXY.

Overview:  Federal Reserve Governor Brainard's suggestion of a rapid unwind of the Fed's balance sheet stoked a bond market sell-off that is continuing today, rippling through the capital markets.  The US 10-year yield is rising for the fourth consecutive session.  The six-basis point gain today puts the yield near 2.62%, which represents a little more than a 25 bp increase since the jobs data on April 1.  European benchmark yields are 3-6 bp higher.  Japan's 10-year yield is poking above 0.23% to again challenge the BOJ's Yield Curve Control.  Equity markets are taking it on the chin.  The major markets in the Asia Pacific region fell, led by a 2%+ sell-off in Hong Kong. China's markets re-opened after a two-day holiday, and although the Shanghai and Shenzhen markets posted minor gains, the CSI 300 slipped by 0.3%.  Europe's Stoxx 600 is off around 1.1% and US futures are about 0.75% weaker.  The dollar is mixed.  The Swiss franc, Norwegian krone, and Japanese yen are weaker.  The Swedish krona, sterling, and euro are posting small gains.  Among the emerging market complex, the South African rand leads the few currencies higher.  Poland, which is expected to lift rates 50-75 bp today has not prevented the zloty from softening.  The Hungarian forint and Indian rupee lead the decliners today.  Gold is edging higher within its consolidative range, after the $1915 area held.  May WTI is firm near $104, but within yesterday's range (~$99.90-$105.60).  US natgas is extending yesterday's 5.6% gain by another 2% today. It is up roughly 40% since mid-March.  Europe's benchmark is snapping a three-day 13% decline with a 2.75% gain today.  Iron ore is off around 1.3%, while copper is slipping lower for the first time this week.  May wheat is paring the two-day 6% rise.   Asia Pacific China's mainland markets re-opened after the two-day holiday.  The news was poor.  The Caixin service and composite PMI were weaker than expected.  The services PMI slumped to 42.0 from 50.2. The composite dropped to 43.9 from 50.1.  In some ways, the news confirms what the market already knew in broad strokes.  The world's second-largest economy is struggling mightily as the zero-Covid policy is disrupting activity.  The lockdown in Shanghai, for example, has been extended.  The economic disappointment will underscore expectations for additional policy support.   New Zealand is placing a 35% tariff on imports from Russia while extending its export prohibitions.  Australia reports February trade figures tomorrow.  Weaker exports and stronger imports are projected to translate into a smaller surplus.  The new pact between the US, UK, and Australia (AUKUS) is not just about the nuclear-powered submarines.  It was announced that they are also working on developing hypersonic weapons.  Meanwhile, a Quad (Australia, Japan, India, and the US) meeting slated for next month may be delayed until after the Australian election.  This also means that US President Biden's first trip to Japan will also be rescheduled.   Rising US yields have helped lift the greenback to JPY124.  The dollar's multiyear high set in late March was almost JPY125.10.  The market looks set to challenge it again and a marginal new high is possible.  Recent comments by the Minister of Finance and the BOJ Governor show continued sharp depreciation of the yen is not desirable.  A month ago, the dollar was near JPY115.  The Australian dollar surged yesterday as the central bank appeared to signal the likelihood of an earlier hike, but it is trading quietly today.  The Aussie is in around a 15-tick range on either side of $0.7575.  Although it reached $0.7660 yesterday, the $0.7600 area may offer a cap today.  China's mainland market re-opened today, and the dollar initially jumped to a five-session high near CNY6.3765.  It spent the local session drifting lower and is now near CNY6.3600, back within the April 1 range.  The PBOC set the dollar's reference rate at CNY6.3799.  The median projection (Bloomberg survey) was CNY6.3791.  Europe German factory orders slumped 2.2%. It was the first decline in four months.  The median forecast (Bloomberg) anticipated a 0.3% decline.  The January series was revised to 2.3% from 1.8%, offering a small consolation.  Domestic orders fell for the second consecutive month, while foreign orders slid 3.3%.  That said, foreign orders have been alternating between gains and losses since at least last August.  A group of economic advisers to the German Chancellor cut this year's growth forecast to 1.8% from 4.6%, while warning that a recession was possible.  Tomorrow, Germany is to report February industrial production figures.  The median forecast is for a 0.2% gain after the 2.7% surge in January.  The risks are on the downside.  Note that yesterday, France reported February industrial output fell by 0.9%, three-times the decline the median forecast anticipated.  The aggregate report is due next week.  Poland's central bank is expected to...

A combination of factors dragged EUR/USD to a four-week low on Wednesday. The Ukraine crisis, uncertainty over the French elections weighed on the euro. Hawkish Fed expectations, the risk-off mood boosted the safe-haven greenback. Investors now look forward to the FOMC meeting minutes for a fresh impetus. The EUR/USD pair added to its recent heavy losses and dropped to a four-week low, just below the 1.0900 mark during the Asian session on Wednesday. The shared currency was weighed down by fading hopes for a diplomatic solution to end the war in Ukraine, which, along with a strong US dollar rally, exerted downward pressure on the major. In the latest developments surrounding the Russia-Ukraine saga, the European Union announced new sanctions against Russia over its alleged war crimes in the Ukrainian town of Bucha. The sanctions include a ban on Russian coals, access to EU ports and transactions of four key Russian banks. Apart from this, worries about the outcome of the French elections turned out to be another factor that undermined the euro. The latest opinion polls indicated that French President Emmanuel Macron's far-right Eurosceptic rival, Marine Le Pen, has been closing the gap ahead of the first round on Sunday. On the other hand, the greenback continued drawing support from firming expectations that the Fed would adopt a more aggressive policy stance to combat stubbornly high inflation. The bets were reaffirmed by hawkish comments from Fed Vice Chair Lael Brainard. She said that the Fed would continue tightening monetary policy methodically through a series of interest rate increases and by starting to reduce the balance sheet at a rapid pace as soon as the May meeting. The markets quickly reacted and pushed the yield on the 2-year US government bond - which is highly sensitive to rate hike expectations - to its highest level since January 2019. Moreover, the yields on the 5-year and the benchmark 10-year bonds shot to their highest level since December 2018 and April 2019, respectively. This, along with a sell-off in the US equity markets, underpinned the safe-haven buck and further contributed to the offered tone surrounding the major. There isn't any major market-moving economic data due for release from the Eurozone on Wednesday, leaving the pair at the mercy of the USD price dynamics. Later during the US session, investors will take cues from the FOMC monetary policy meeting minutes. The incoming geopolitical developments would influence the pair and allow traders to grab some short-term opportunities. Technical outlook From a technical perspective, the sustained overnight breakthrough, the 1.0960 horizontal support and a subsequent slide below the 1.0900 mark favour bearish traders. With technical indicators holding deep in the negative territory and still far from being in the oversold zone, the pair seems vulnerable to sliding further towards the mid-1.0800s. The downward trajectory could further extend towards challenging the YTD low, around the 1.0800 round-figure mark touched on March 7. On the flip side, attempted recovery moves might now confront immediate resistance near the 1.0960 support breakpoint. Any further move up is more likely to meet with a fresh supply and remain capped near the 1.1000 psychological mark. Some follow-through buying would negate the bearish bias and prompt some short-covering move. The pair could then climb to the next relevant hurdle near the 1.1040 region before aiming back to reclaim the 1.1100 round-figure mark.

FOMC will release the minutes of the March policy meeting on April 6. CME Group FedWatch Tool points to a more-than-70% probability of a 50 bps hike in May. US Dollar Index stays within a touching distance of multi-year highs. The greenback has started the month of April on a firm footing on the back of the latest data releases from the US and rising odds of a 50 basis points (bps) Federal Reserve rate hike in May. The US Dollar Index (DXY), which tracks the dollar’s performance against a basket of six major currencies, is already up nearly 1% since the beginning of the month. The Fed will release the minutes of the March policy meeting at 1800 GMT on Wednesday, April 6. On March 16, the Fed decided to hike its policy rate by 25 bps to the 0.25%-0.5% range as expected. The Summary of Economic Projections, the so-called dot plot, revealed that the median view of the Fed funds rate at the end of 2022 was raised to 1.9% from 0.9% back in December. According to the dot plot, policymakers see the Fed hiking its policy rate by 25 bps at every meeting for the rest of the year. Since the March meeting, however, conditions have changed and investors started to evaluate the prospects of double-dose rate hikes. The US Bureau of Economic Analysis reported on March 31 that the annual inflation, as measured by the Personal Consumption Expenditures (PCE) Price Index, climbed to 6.4% in February. More importantly, the Core PCE Price Index, the Fed’s preferred gauge of inflation, rose to 5.4% from 5.2% in January. It’s worth noting that the latest PCE inflation data do not reflect the impact of the Russia-Ukraine conflict and the coronavirus-related lockdowns in China on price pressures. It would be plausible to assume that inflation has more room to rise before finally starting to retreat. Additionally, the March jobs report revealed that the labor market conditions continued to tighten. Nonfarm Payrolls rose by 431,000, the Labor Force Participation Rate stayed virtually unchanged at 62.4% and the annual wage inflation climbed to 5.6% from 5.2% in February. At the post-FOMC press conference, FOMC Chairman Jerome Powell acknowledged that it was possible for the Fed to move rates up more quickly to tame inflation. Several Fed policymakers, including Cleveland Fed President Loretta Mester and St. Louis Fed President James Bullard, voiced their willingness to frontload rate increases to preserve the Fed’s credibility and ease price pressures. As it currently stands, the CME Group FedWatch Tool shows that markets are pricing in a 74.4% probability of a 50 bps rate hike in May. Hawkish scenario The Fed may have backed itself into a 25 bps hike by dismissing the possibility of a 50 bps hike in its pre-meeting communication in March. In case the minutes show that policymakers considered a bigger rate increase but ended up voting for a 25 bps one to avoid a big market reaction, US Treasury bond yields could continue to rise and provide a boost to the dollar.  Market participants will also pay close attention to details surrounding the Fed’s plan to shrink the balance sheet. Powell noted that they will need to reduce the $8.9 trillion balance sheet to make sure high inflation does not become entrenched and NY Fed President John Williams said they could start doing that as early as May. The greenback could continue to find demand if the publication unveils that policymakers are willing to make large cuts to the balance sheet in the second half of the year.  Dovish scenario Policymakers are worried about a prolonged Russia-Ukraine conflict weighing on global economic activity. Powell, however, explained that they were more concerned about the impact of the crisis on inflation rather than growth. A cautious language on future rate increases amid heightened uncertainty could be seen as a dovish development and trigger a dollar selloff.  DXY Technical Outlook  DXY closed above the 20-day SMA on Monday after staying below that level in the previous three trading days. Confirming the bullish shift in the near-term technical outlook, the Relative Strength Index (RSI) indicator advanced to 60. On the upside, 99.40 (static level, multi-year high set in early March) aligns as first resistance. With a daily close above that level, the index could target 100.00 (psychological level) and 100.40 (static level). In case the dollar faces selling pressure on a dovish surprise, DXY could drop to 97.80 (static level). If sellers manage to flip that level into resistance, further losses toward 97.30 (50-day SMA) and 96.70 (100-day SMA) could be witnessed.   

Overview: Watch the video for a summary of this week’s news releases, a review of the USD index, and a complete top down analysis of the EURUSD.