As Markets Await FOMC, Did the ECB Signal a Détente in FX Wars?
- AUD/USD base may be in as risk markets rally broadly.
- As FX market volatility stays elevated, it's a good time to review risk management principles.
Markets are at a sentiment turning point. It’s evident that the European Central Bank is less concerned with the Euro exchange rate after its latest round of stimulus efforts. Rather, the ECB is hoping that its measures to reduce credit risk will help stimulate lending. Whether or not the measures work is an entirely different story. Yet in the short-term, there has been a pattern starting to emerge: a détente may have been called in the emerging global FX wars. Watch the video (above) for an expanded discussion on this topic.
The only hurdle to the sentiment turn happens to be the biggest one of them all: the FOMC meeting this Wednesday. Markets have quickly brought forward rate expectations, but they haven't helped the US Dollar in recent weeks. Three months ago, the implied probability of a rate hike in June, per Fed funds futures contracts, was 26%. By the end of last week, it was 50%, and there was a 36% chance of a second rate hike this year in December (chart 1 below).
Chart 1: Fed Funds Futures Contract Implied Probabilities
--- Written by Christopher Vecchio, Currency Strategist
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