The Fed is increasingly resembling the chorus in the market with opposing views on the inflation risk, only there is a key difference. The kiwi was the top performer on Wednesday while the yen lagged. US jobless claims and durable goods orders are due up next. GBP is the weakest of the day after the BoE kept its vote on asset purchases at 8-1, with Haldane--the lone hawkish not having an impact as he leaves the BoE this month. Keep an eye on Fed's Williams speech at 11 am EST (4 pm London) 

This week has been all about Fed talk and the debate about signaling rate hikes sooner rather than later. Atlanta Fed President Bostic weighed in saying he was one of the dots forecasting a hike in 2022 and two more in 2023.

It's important to note though that he won't be a voter in either of those years. Much of the hawkish commentary has been led by regional presidents while the 6 Fed governors along with permanent voter NY Fed President Williams are on the patient side. Powell will govern on consensus but there's little chance of the FOMC being bullied. In addition, Biden will presumably nominate another dove to fill a Fed vacancy later this year.

The market generally treaded water Wednesday but the Australian dollar did rise back above the key 200-dma. One asset that is struggling to find traction after the rout is gold, which isn't benefiting at all from the ebb in rate-hike fears.

Looking ahead, the economic calendar remains busy headlined by the May prelim durable goods orders report. There is little question about the strength of the sector and that was underscored again by the record in the Markit manufacturing PMI on Wednesday. The only issues it outlined were difficulties in finding workers and raw materials.

What looked like a technical collapse in crypto prices on Tuesday turned into an improbable turnaround with bitcoin finishing higher. In FX, last week's US dollar rally continued to unwind with a growing chorus of Fed speakers underscoring patience before making any moves on a taper. Ashraf cautions us to watch the renewed outperformance of Tech stocks vs cyclicals --which could mean yields may not be rebounding above 1.53/4% anytime soon, raising questions about growth and inflation. Ashraf also reminds us of the persistent higher lows in percentage daily changes of Bitcoin in the chart below, as well as this possible development.

Even by the wild standards of the crypto market, Tuesday's move was impressive. It looked grim for bitcoin early in New York trade as it broke through $31,000 and then cascaded down to $28,800 in a quick but orderly move.

As headlines flashed that it had wiped out all the gains for 2021, it came back to life. Evidently there were buyers waiting for a dip below $30,000 and they pounced. That was followed by a FOMO rally that took it to $34,200 at the time of writing.

The pain elsewhere was larger and the bounces haven't been as impressive. That may be a hint that flows are traveling from alt coins into bitcoin. If that's the case, it may only be a temporary respite. That said, price action can turn into its own fuel for a rally.

Overall, the breaks of some key support levels throughout the market aren't a great sign. There is a chance for a false breakout and reversal here but that would be a rare feat. We will be watching very closely and staying nimble in the days ahead.

One slight tailwind for crypto has been the continued decline of the dollar. We're watching AUD/USD very carefully as it re-tests the break of the 200-day moving average and the prior lows of the year, which are now resistance.

A central bank turning hawkish is undoubtedly one of the great currency buying signals, and recent USD price action has sent that same kind of signal, but are we jumping the gun?  DXY stopped at its 55-WMA but remains well above its 200-DMA. Do NOT forget Powell will testify on the economy Tuesday at 2 pm Eastern. US 10 yr yield respected its 3-mth trendline support, while XAUUSD did the same at 1763/5.

The Fed decision was undoubtedly a surprise last week. The dots moved further than nearly anyone anticipated but it wasn't just that. After all, the dots have a poor track record of predicting rate moves and have been too hawkish since they were introduced. What also changed was that Powell went from a wait-and-see mode on data to anticipating strong jobs numbers while beginning to fret about higher prices.

On Friday, St Louis Fed President (and noted hawk) Jim Bullard underscore the Fed messaging by saying the Fed needs to be ready to taper and that inflation data has been more intense than expected.

What may have been less appreciated was how he benchmarked his rate hike on economic data. He said that strong inflation of 2.5-3.0% through 2022 would meet the framework for justifying a rate hike.

That's still a high bar.

Many market watchers are declaring the current round of high inflation as the overshoot that the Fed wanted but that's not the case. Even Fed hawks haven't abandoned 2022 inflation as that period.

Ultimately, the market will fall back on looking at inflation and prices rising as high as Bullard is forecasting is far from a sure thing. Some of the bottlenecks pushing up prices now – used cars for instance – will create disinflation pressure in the year ahead, assuming that they unwind.

So while we have seen some impressive moves that have no doubt been exaggerated by short covering, we're probably not yet at the big turn in markets. The question through is how far to ride this move and when to fade it.

Monday's price action will offer plentiful hints.

The dominant theme in trading in 2021 was reflation but that rested on the Fed letting prices run hot. On Wednesday, that was upended and so were bets on inflation in a sharp move lower in commodities. The reflation trade unwound in a messy thes epast 2 days. First, it was the long-end of the bond market finding a strong bid that eventually pulled 30-year yields to the lowest since February. The charts below show how the sharp in bond yields of the last 48 hrs helped NASDAQ, while weighing on DOW30 and SPX. Ashraf will prepare a detailed video this weekend on these relationships and how they tie in with gold and USD.  

The pullback in yields confused bond bears, indicating market sees declining chances of an inflation overshoot and a consistent return to +2% CPI. The commodity market was quick to jump on the shift, with nearly everything falling sharply, including a 2.2% fall in gold, a 7% fall in soybeans and a 5% decline in copper.

With that, the commodity currencies also dropped. The declines in AUD and NZD were particularly stark given that Australian employment and New Zealand GDP were both very strong.

In equities, the trade manifest itself as a fall in small caps and a jump in tech.

Is the Fed displeased with the market reaction? They fought hard for credibility on an inflation overshoot but have squandered it. That said, this may also be a tactical retreat from Powell and the Fed governors. They don't have any control over the dots but he hasn't conceded any ground on a taper or rate hikes yet. The real discussion won't take place for a few months yet and by that time they might have a clearer idea on whether or not inflation is transitory or not.

For now though, the dollar is ascendant and because shorts are such a crowded trade, there is some room to run.