November 24, 2022
  • November 24, 2022

Is the Fed about to slow the pace of tightening?

By on October 22, 2022 0

On Friday morning, the US dollar and yields were soaring. The US dollar index was approaching 114.00 again and US 10-year yields were screaming at 4.335%, their highest level since June 2008! The markets seemed to have gotten a bit ahead of themselves in terms of interest rate expectations. Enter Nick Timiraos.

Nick’s articles sometimes move the markets, as it is suspected that the Fed is “whispering” messages to him to publish. In June, during the Fed’s blackout period ahead of its FOMC meeting, Nick published an article suggesting that the Fed was going to raise rates by 75 basis points. Markets were expecting a 50 basis point hike. At Powell’s press conference following the FOMC meeting, Powell admitted that he wanted to send the message to the markets that a 75 basis point hike was imminent. Today, Timiraos and the WSJ published an article suggesting that the Fed will raise the fed funds rate again by 75 basis points, AND possibly start discussing how to bring rate hikes down to just 50 basis points baseline at its December meeting.

The US Dollar Index (DXY) and many of its counter currencies, as well as yields, quickly reversed. The DXY fell from a 101 pip rise to a high of 113.94 to unchanged on the day near 112.94. Notice that the index was breaking out of a consolidation triangle as the news passed. If today’s inverted hammer holds, this could turn out to be a false breakout and price could move to test Wednesday’s lows at 111.91.

Source: Tradingivew, Pierre X

The same goes for bond yields. If the Fed threatens to start slowing the pace of rate hikes, bond yields could start to fall. Notice how 10-year yields have risen in a rising wedge. Returns are expected to come out lower from the model. However, on Thursday, yields broke above the upper trendline. Is this a fake escape? The action of the returns after the item hits the wires is similar to that of the DXY. Yields were reaching new highs and soon reversed. If the inverted hammer holds the day, yields could pull back inside the wedge and test the pattern’s lower trendline near 3.85%. Also note that the RSI has divergent returns, indicating that they might be ready for a correction.

Source: Tradingivew, Pierre X

Will today’s “leak” to the WSJ be the straw that will break the camel’s back for the US dollar and US rates? Markets will likely have to wait for the official meeting on November 2n/a to find out, but traders are warned. And if Nick Timiraos’ previous articles are any indication, the Fed could slow the pace of rate hikes sooner rather than later!