Dollar Hollar: Fed Rate Hike Expectations Continue To Collapse

Dollar Hollar: Fed Rate Hike Expectations Continue To Collapse

The Markets continue to wind back their expectations of an imminent FED rate move. The implied probability of a move at the next meeting has collapsed to below just five percent, the adverse move in October implied probability has been replicated in the December pricing with the probability for a move dropping to 30.9%

2015-10-22 11_31_15-Countdown to FOMC - CME Group

The decline in expectations has been driven by continued concerns around the strength of domestic economic data. With both inflation and manufacturing data disappointments weighing on the markets mood.

As would be expected the market continues to unwind long USD bets as demonstrated by recent COT data, in the five weeks leading up to the September meeting traders commenced paring their bullish US Dollar bets. The COT positioning data for the three weeks after the meeting shows that this trend has continued to develop. Eight of the last nine weeks have demonstrated further down-scaling. Speculators remain long-biased the USD against most major currencies, but at a net 175k contracts, the bullish bias is at its lowest levels since September 2014. The prolonged range trade since March year has clearly frustrated traders.

Fed speakers continue to reiterate caution with respect to FED action, even the Hawks on the board have continued to express increasing uncertainty regarding the near-term economic outlook.

US Dollar has had a mild uptick in the past couple of days, and US bond markets are weaker as Fed rate hike expectations moved up a notch after a US housing starts report that was a bit firmer than expected. However, the short-end bills remained under selling pressure especially those maturing in November, on unresolved concerns about the political gridlock to extend the US government’s borrowing limit before 3 November.

The US Dollar Index has drifted higher this week, demonstrating strength against most FX majors, driven by lingering concerns about the global growth landscape, underpinned with declines in Japanese trade data, issues around the Chinese growth outlook, and latterly the Bank of Canada downgrading its growth forecasts for both 2016 and 2017. The combination of these drivers has seen a flight to safety move int he markets with US Treasury yields rising across the curve.

Traders are eagerly awaiting today’s ECB meeting and pawing over the press conference for clues as to the whether President Draghi will seek to extend quantitative easing in Europe. Options markets indications with respect to volatility and skew are suggesting that market participants see a higher probability of a hint at the further action as the premiums that capture this meeting are more elevated than any other ECB meeting levels this year.If President Draghi does deliver on further easing measures, this will likely continue to support the USD in the near term.

Trading Take Away

Near-term, trading is likely to prove volatile around today’s ECB meeting and press conference. However, I will stick to the pattern and plan referenced in last weeks segment. I continue to monitor intraday reversal patterns. The ECB price action could provide the catalyst for a spike into the resistance zone highlighted on the chart below, in a classic retest of the-the apex of the recent range and the broken ascending trendline support. While the 95.50 area contains the upside drift I am anticipating a move lower to test the lows of the broader range towards 92.00

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  • Will monitor intraday reversal patterns on a test of 95.50 leaning against recent range highs at 96,50 playing for a retest of the the broader range base at 92.00. Interestingly the Psychology indicator is also testing resistance levels that have proceeded near to medium term reversals

For updates on this trade set up and the other trades I am currently monitoring be sure to follow me on Twitter @LFXPatrick


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