The forex market is expecting an interest rate increase to match the post-Trump odds in December, and judging by the spikes in the future markets, the Fed won’t disappoint. According to Bloomberg reports, the odds of the Fed move by December have increased from 68% at the beginning of November as inflation is expected to increase to near 100%. However, apart from the managed employment data, no one is quite sure about what the Fed sees to validate this predictable increase. Here are the key things that the investment analysts are talking about amid interest rate hike.
Fester tightening cycle
Beyond December, the swap trading indicates the anticipation or a quicker tightening circle. The market index swap contracts experienced in the last few days implied the benchmark rate of the central bank will remain constant at 1.25% in the next two years as opposed to 0.83% seen the day before the U.S election. This means that the market pricing is expecting another increase following trump win as the republican controlled congress signify a wave of spending to strengthen the economy.
The dollar upward trend
The dollar continues its upward trend on a tight-Fed policy and the view of financial spending on projects under Trump presidency. With that said, the dollar has reached its highest level against the EUR in 12-months and five months higher against the Japanese Yen, JPY. The stronger data in the retail sales and rate differential is expected to continue supporting the USD against G10 low yielding currencies.
USD/JPY is 0.6%, to ¥109.60, its strongest since June 2016. The EUR/USD is down by 0.2% to €1.0300, the lowest since December, 2015. The EURO will remain under pressure on weakening sentiments and political risk that is resulting in an increased demand for downside protection. The weak prospects and fundamentals that the ECB is going to continue with their negative rates and Q.E program only add more risk of further EURO weakens.
The pound went up ahead of the U.S open, after data indicated that the UK unemployment rate fell below +5.0% in three-months to September. The market bets on the sterling pound weakening further were actually minimised for the fifth straight week, implying that sentiments is beginning to slightly shift positively towards the sterling pound. However, the Brexit extension and the vulnerability of the pound are expected to swing the risk, limiting the sterling moves to higher odds.
In short, the dollar overall upward trajectory may remain undisrupted, but its dominance to higher currencies should be adjusted. Just like the bull equity run, it will eventually be caught by higher rates. So, despite the breather, the market risk is expected to remain high, combined with additional increases in volatility as investors continue to project the type of policies that might eventually come in the Trump regime.
The declining bond
Sovereign bond prices continue to fall after the brief break. The UK 10-year gilts and the yield on German bonds have backed. In Japan, the 10-year bond went down for a sixth day, lifting their yield to over + 0.034. The Bank of Japan is closely watching the market, and it is suspected that the bank may purchase more bonds to lower the yield towards the target. In fact, the Bank of Japan has been trading for two months in a negative territory.
The Fed’s Bullard comment in London on 17th November, 2016 is also adding more weight to the short end of the U.S curve yesterday. Analysts predict that increasing the rate would be enough to create a neutral stance to the U.S monetary policy. Besides, the proposed increased infrastructure spending by the president-elect, Trump, might increase the growth starting 2018.
Equities continue to go higher on growth prediction
The fact that CMC Markets believe that the global economic growth is satisfactorily strong enough to enable the Fed to increase the rates in favour of the global financial stock, it will support the dollar and hurt fixed income. This influenced the major stocks in the market, closing at a positive percentage yesterday.
The market will react to the Fed char testimony tomorrow about the economic outlook of the United States before that Economic Committee to increase their final bets this year.