Some profit-taking set in after ‘the street’ went long the EURUSD ahead of the European Central Bank (ECB) announcement last night.

However, the move higher on the EURUSD is more about what US CPI said about absentee inflation than the jumbled messaging from the ECB. This trade is still very much US rates play but is now becoming more about how the Federal Open Market Committee (FOMC) will play their cards.

Will the Fed continue to “walk the dovish talk’ with its US dollar negative implications. Or will the Fed “walk back” from their dovish commitments when and if it becomes clear that the fiscal and vaccine led recovery is kicking into full gear?

Indeed, it is the line that separates the dollar bulls from bears over the next 6 to 12 months. Until then, FX traders will continue to travel on the path of least resistance focusing on pure beta currency reflation trades like the NOK and CAD.

That said, the cat and mouse game between the US Fed and the market will continue for months.

Commodity prices a boost to the Ringgit

There has been a significant reversal in Emerging Market sentiment that has benefited the Malaysian Ringgit through both the higher commodity channel and the stronger Yuan coaxing Asia FX along on the back of improving China risk sentiment.

There has been a rapid reversal in US dollar sentiment over the last four weeks. For the first time since mid-June 2020, the average USD positioning is net long USD, with short positions remaining only in USDCNH and USDINR, albeit marginally.

Indeed, this has been driven by the move higher in US bond yields, and it’s a broad-based risk-off move rather than a specific view on any of the countries in the survey.

Even though we have had a reversal of fortunes in ASIA FX as US yields stopped climbing, but the survey suggests that USDAsia should continue to track US yields higher if that does become the case.

Gold remains under pressure

Gold is getting no joy above $1730 as suggested yesterday. Regardless of where the dollar shifts, we need to see a break below the psychological 1.5 % UST 10 Y level to test where near-term resistance stands. Until then, the elephant in the room remains ETF liquidation.

The gold price may have found a floor here and will be comfortable for a bit. But if US yields start to break new ground or the FOMC surprises by hinting at taper (25 % chance), it could be lights out above $1700.

If you don’t think the US economy will surge and 10-year yields won’t rise to 1.85-2.25% as predicted by Wall street, certainly buy gold and lots of it. But really, you are swimming against the current on this one, I’m afraid.

But I will leave you with one quote I like to use from my old trading boss back in the day “When all the experts and forecasts agree — something else is going to happen.”

Market analysis from Stephen Innes, Chief Global Market Strategist at Axi