Quiet Calendar has US Dollar Focused on Fed Rate Expectations
- Fed funds now pricing in September 2017 for first hike, up from January 2018 last Tuesday.
- USDOLLAR Index has reclaimed half of its losses from the Q2'16 GDP report as rate expectations have climbed.
- August is typically a bad month for risk and a good month for the US Dollar - see the August forex seasonality report.
It's been quite a volatile past few weeks for the US Dollar (among others), but volatility in the near-term may cool off. The simple truth is, it's August, and it's an Olympics year; exogenous conditions aren't exactly cultivating an environment in which participants would want to be actively engaged in the market.
Accordingly, with that backdrop in place, the quiet economic calendar among G7 economies this week does no favors for traders looking for volatility. Similarly, given that it is the summer, traders may be overstimulated after numerous policy shifts from various central banks and governments the past few weeks - the BOJ and the MOF, the BOE, the RBA, and the Fed.
Absent incoming economic data that could start to shape forthcoming monetary policies - of which there is very little on the calendar in the week ahead - traders really only have one thing to pay attention to: Fed rate hike expectations. As the USDOLLAR Index has clawed back around half of its losses since the Q2'16 US GDP report, so too have rate expectations climbed, with markets now pricing in September 2017 after the July US NFP report, up from December 2017, for the Fed's first rate hike. Pre-Q2'16 US GDP, June 2017 was the favored month.
In a sense, half of the rate expectations have been repriced as well. A heuristic has revealed itself: in absence of US economic data, traders should simply watch when Fed funds futures contracts are implying the first rate hike will come.
--- Written by Christopher Vecchio, Currency Strategist
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