News & Analysis at your fingertips.

We use a range of cookies to give you the best possible browsing experience. By continuing to use this website, you agree to our use of cookies.
You can learn more about our cookie policy here, or by following the link at the bottom of any page on our site. See our updated Privacy Policy here.

0

Notifications

Notifications below are based on filters which can be adjusted via Economic and Webinar Calendar pages.

Live Webinar

Live Webinar Events

0

Economic Calendar

Economic Calendar Events

0
Free Trading Guides
Subscribe
Please try again
More View more
Real Time News
  • Key break here in the 10-year #Treasury yield as it rises to the highest since late June Took out 1.4230 resistance, and the 100-day SMA Eyes now on the 38.2% Fib extension at 1.4775 Also potential falling resistance from March https://t.co/4cI6l210ui
  • The move in rates after this week’s FOMC has continued and the 10 year yield has pushed up to a fresh two-month-high. Get your market update from @JStanleyFX here:https://t.co/CRWhuZ3sxD https://t.co/svHHqN2Zz8
  • S&P 500 contending with its proverbial ‘line in the sand’ as bulls and bears battle for directional control. How we close/trade around the 50-day moving average could serve as a noteworthy bellwether for risk trends headed into next week. I remain cautious below ~4,480. $SPX $ES https://t.co/qogkjs1Sx2
  • USD/JPY trades to a fresh monthly (110.57) amid the pickup in longer-dated US Treasury yields, and the exchange rate may stage a larger advance over the coming days. Get your market update from @DavidJSong here:https://t.co/dlNXOrJnM9 https://t.co/LCQd26W1zF
  • US yields continue to climb, with the 10-year Treasury yield trading above 1.45% $ZN $ZB https://t.co/N4EDfwD3nZ
  • $USDJPY bull thesis appears quite constructive. Technicals show topside breakout above trend resistance following a period of consolidation. Bond yields providing the fundamental catalyst. Eyes on Aug/YTD highs. A broad-based deterioration in market sentiment poses downside risk. https://t.co/AazskXGjHq
  • WTI posting another session of strong gains, currently flirting with the 74 handle $CL #Oil #OOTT https://t.co/oYnm2OYRky
  • The New Zealand Dollar’s bullish breakout attempt in early-September was rebuffed. Price action at the end of the month is telling a different story. Get your market update from @CVecchioFX here:https://t.co/AquMSrssne https://t.co/DtFuFfrS7Q
  • So much for that Evergrande recovery. Shares of the troubled Chinese property developer are down approximately -12% today following yesterday's impressive rally (biggest in a year) https://t.co/Nome25d9Bt
  • Retail trading platform Robinhood announces hire of new Chief Compliance Officer amid regulatory scrutiny
Fed Rate Cut Odds Driving US Dollar, Gold Prices, Stocks - Central Bank Weekly

Fed Rate Cut Odds Driving US Dollar, Gold Prices, Stocks - Central Bank Weekly

Christopher Vecchio, CFA, Senior Strategist

Central Bank Weekly Talking Points:

  • With the US-China trade war posing a very real threat to the US economic outlook, the June Fed meeting revealed that FOMC policymakers are standing ready to cut interest rates.
  • Fed funds futures are discounting three 25-bps rate cuts by the end of 2019, while Eurodollar contracts are discounting two rate cuts by December 2019 and a third rate cut by June 2020.
  • Retail traders continue to buy the US Dollar despite evidence of major topping potential.

Looking for longer-term forecasts on the US Dollar? Check out the DailyFX Trading Guides.

The past week produced two major central bank meetings: the Federal Reserve on Wednesday and the Bank of England on Thursday. With respect to the latter, the June BOE meeting was as bland as it could come. With the latest Brexit news yielding little progress by way of finding a workable withdrawal agreement as the focus is squarely on the Tory leadership election, the BOE remains sidelined by domestic political factors. But for the former, the June Fed meeting has proved to be of monumental importance to global financial markets.

The Fed is Responding to Trade Wars

In a previous iteration of this note, we explored the various ways that different central banks around the world could respond to the growing threat of trade wars. “For central banks like the Federal Reserve or European Central Bank, there is too much global reliance on the stability of asset prices in order to dramatically surprise market participants. Instead, these central banks move at a more glacial pace…if the Fed is going to get involved in trade wars, then it is highly likely that it will do so along the interest rate route.”

The June Fed meeting produced just that: a response to the US-China trade war via the interest rate route. Dropping the promise to remain “patient” on the next rate move, FOMC policymakers leaned into dovish speculation by market participants that a series of interest rate cuts could be on the verge of transpiring.

Fed Funds Pricing Three Potential Rate Cuts in 2019

With the threat of US-led trade wars accelerating at the start of May, interest rate markets have aggressively discounted dovish Fed action over the next several months. At the start of May, there was a 68% chance of a 25-bps rate cut by the end of the year, according to Fed funds futures, and only one 25-bps rate cut was discounted by June 2020, according to Eurodollar contract spreads.

Federal Reserve Rate Hike Expectations (June 21, 2019) (Table 1)

fed rate, interest rate, fed interest rate, fed rate expectations, usd rate expectations, federal reserve rate cut odds, fed rate cut odds, fed rate hike odds

After the June Fed meeting, interest rate pricing has evolved significantly. According to Fed funds futures, there is now a 78% chance of a first 25-bps rate cut in July, an 84% chance of a second rate cut in September, and a 63% chance of a third rate cut in December.

Eurodollar contracts are similarly aggressive in their pricing. We can measure whether a rate cut is being priced-in by this time next year by examining the difference in borrowing costs for commercial banks over a specific time horizon in the future. The chart below showcases the difference in borrowing costs – the spreads – for the June 19/December 19 (orange) and June 19/June 20 (blue) periods.

Eurodollar Contract Spreads – June 19/December 19 & June 19/June 20: Daily Timeframe (March 2018 to June 2019) (Chart 1)

eurodollar contracts, eurodollar contract spreads, fed rate cut, fed rate cuts, fed rate cut odds, interest rates

Eurodollar contract spreads are currently indicating that there will be two 25-bps rate cuts by December 2019 and a third 25-bps rate cut by June 2020. This dramatic shift in rate cut odds has been the primary factor driving US Treasury yields lower, in turn feeding into what appears to be major topping potential for the US Dollar (via the DXY Index).

Rate Cut Odds are Frontloaded Due to US-China Trade War

Nevertheless, it’s important to recognize a peculiarity about the way interest rate markets are currently discounting Fed rate cuts: the rate cuts are extremely frontloaded. That’s to say that markets feel that if rate cuts are coming, they’re going to come over the next several months, a direct response to the growing threat of the US-China trade war.

Therefore, traders need to be cautious over the next week. With US President Donald Trump and Chinese President Xi Xingping set to meet at the G20 summit next weekend, there will be meetings ahead of time between diplomats and negotiators to give the two leaders an opportunity to come to an agreement to end the trade dispute. It stands to reason that if a US-China trade deal materializes in the near-term, there will be a violent repricing of Fed rate cut odds.

Fed Rate Pricing Likely Leads to More Volatility

If the most likely scenario for the Fed is to cut rates two times in 2019, the second most likely scenario may be that there are no rate moves at all. In turn, this disparity in potential outcomes will lead to an environment with increased volatility over the coming weeks and months.

Heightened volatility in Fed rate cut odds means more volatility across the board for all assets: US Treasury yields; US equity markets; the US Dollar; USD-denominated commodities; emerging markets; etc. For most assets (like stocks), heightened volatility is undesirable; for some assets (like gold), heightened volatility is a welcomed development.

DXY INDEX TECHNICAL ANALYSIS: DAILY PRICE CHART (JUNE 2018 TO JUNE 2019) (CHART 2)

dxy price forecast, dxy technical analysis, dxy price chart, dxy chart, dxy price, usd price forecast, usd technical analysis, usd price chart, usd chart, usd price

For now, with Fed rate cut odds through the roof, the wheels of a major US Dollar top are still in motion. The bearish rising wedge dating back to the March 2018 lows is seeing follow through to the downside, with the DXY Index evidently in a downward sloping channel since the start of May.

With price below the daily 8-, 13-, and 21-EMA envelope, coupled with the fact that both daily MACD and Slow Stochastics continue to trend lower in bearish territory, it holds that the momentum profile remains bearish for the US Dollar. Losses may extend towards channel support and the 50% retracement of the 2017 high/2018 low range near 96.50 over the coming days. Reversal odds increase with a move above the daily 8-EMA (currently at 96.98).

FX TRADING RESOURCES

Whether you are a new or experienced trader, DailyFX has multiple resources available to help you: an indicator for monitoring trader sentiment; quarterly trading forecasts; analytical and educational webinars held daily; trading guides to help you improve trading performance, and even one for those who are new to FX trading.

--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher Vecchio, e-mail at cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

View our long-term forecasts with the DailyFX Trading Guides

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

DISCLOSURES