Aggressive tightening and perhaps a more difficult risk environment will dominate FX now, in the view of economists at ING. An extreme example here remains Paul Volcker's time at the Federal Reserve – lauded by Fed Chair Jerome Powell. This reminds us that the dollar can soar.

Pro-risk commodity pairs to hand back some of the war-inspired gains

“Volcker slayed the dragon of inflation by taking rates to 15%, sending the US economy into recession and the dollar soaring. Could that be the 2022 story? The jury is out on how high the Fed will take rates, but with the terminal rate for Fed funds being priced higher each day (now at 3.35%) it seems far too dangerous to try and pick a top. And equally, that is why we see the dollar staying strong for most of the year.”

“If we are to shift to a more difficult risk environment on the back of what we call involuntary tightening (where real yields go more deeply into positive territory) we could start to see some of the pro-risk commodity pairs hand back some of the war-inspired gains. We are thinking here of a pair like AUD/JPY. A quick 3-5% snap-back lower could be on the cards over the next month. Equally, CNH/JPY could correct sharply lower too, seemingly putting in an important top this week.”

“Do not try to fight the strong dollar bull trend and DXY can probably hold above 100.”