USD Eases as Rate Expectations Steady; GBP Awaits May Speech
- DXY Index is slipping for the second consecutive day, as it seems that some market participants aren't buying into the message from the Fed's meeting this past Wednesday.
- US Treasury 10-year yield needs to clear 2.286% (and hold above 2.224% at a minimum) to keep the US Dollar bottoming process on track.
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The US Dollar is easing off for the second consecutive day following the September FOMC meeting as it appears that the rebound in rate expectations has hit a ceiling. Ahead of the Wednesday policy conference, Fed funds futures were pricing in approximately a 45% chance of a 25-bps rate hike by December; immediately after the meeting through early yesterday morning, the odds had risen to near 65%; and today, they've fallen back to near 60%.
Accordingly, while we can now say that rates markets have begun to price in a December rate hike - odds are above our 60% threshold, established thanks to the historical precedent of the Fed having raised rates each time market expectations were at least 60% for the front month - it seems that there is still a significant portion of market participants who just 'aren't buying what the Fed is selling' - they're just not yet willing to believe that the Fed will hold true to its word of hiking three times this year.
In the near-term, a cooling of rising rate expectations will undoubtedly prove to be an obstacle the US Dollar needs to overcome. The key instrument to watch will be the US Treasury 10-year yield, which as we've previously discussed has been the most significant factor for pairs like USD/CHF, USD/JPY, and Gold in September. Having just cleared out the August 23 bearish outside engulfing bar at 2.224%, the 10-year yield now needs to break through 2.286%, the August 16 swing high, in order to signal the next effort at the US Dollar bottoming process is happening.
For now, following the FOMC rate decision, risk in any USD-pairs should be contained to the outside engulfing bar level established on Wednesday (i.e. if short EUR/USD, the stop would be above Wednesday's high; if long USD/JPY, the stop would be below Wednesday's low).
--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
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