Friday February 11, 2022 - 11:49:37 GMT
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Trading in the Forex Twilight Zone
If I told you CPI would come in hotter than expected, US yields would spike sharply higher and the dollar, which initially moved higher, would reverse course to trade sharply lower, would you say we have entered the Forex Twilight Zone?
What made this even more confounding was the dollar falling as markets started to priced in 6 Fed rate hikes in 2022 (vs. 5 hikes pre-data) and calls came out for a 50bp rate hike at the March 16 FOMC meeting (vs. 70/30 idds in favor of a 25bp hike pre-data)
What is the Twilight Zone?
According to Wikipedia, The Twilight Zone (marketed as Twilight Zone for its final two seasons) is an American horror anthology television series created and presented by Rod Serling, which ran for five seasons on CBS from 1959 to 1964. Each episode presents a stand-alone story in which characters find themselves dealing with often disturbing or unusual events, an experience described as entering "the Twilight Zone," often with a surprise ending-and a moral….
Does this sound familiar?
Well. this is what happened on Thursday, February 10 until stocks finally paid notice of rising US bond yields and fell sharply. This, in turn, saw the dollar recover ground, which has since been extended into early Friday trading.
The following is not meant to be a plug for The Amazing Trader (AT)but just a personal observation. I have learned and passed on to subscribers not to ignore what AT is showing on your charts no matter what your gut says. I also say don’t look to fade a move until AT gives a sign it is time to do so.
This was proved once again to be invaluable advice on Thursday until the market had a reality check and moved out of the Forex Twilight Zone.
The moral of this episode reminded of an old trading adage that went something like this: Markets can remain irrational longer than you can remain solvent. Keep this in mind the next time you see the market entering the Forex Twilight Zone.
Looking ahead, the jury is out whether currencies such as the EURUSD can move out of current ranges (e.g. 1.13—1.15 with the next key AT level looming below at 1.1266).
In any case, logic says the US interest rate risk suggests the dollar should find support or at least a limit on its downside ahead of the March 16 FOMC meeting.
On the other hand, there may be another reason why the dollar has not moved higher that I will address in a coming article.
Jay Meisler, co-founder, global-view.com
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