Talking Points:
• The DXY Dollar Index rose six straight days through Monday pushing the it within reach of a 2 year range high
• According to Fed Fund futures, the chances of a 92 percent probability of a hike at the December 14th meeting
• Despite inflation stats and a slew of Fed speakers this week, closing on certainty is increasingly difficult
See what live coverage is scheduled to cover key event risk for the FX and capital markets on the DailyFX Webinar Calendar.
There are a number of high-profile fundamental themes driving the Dollar and other key market benchmarks, but interest rate forecasts is once again seizing Greenback traders' attention. After the best weekly performance in 12 months, the currency extended its run Monday to a sixth straight advance. The currency is now within striking of 100.50 - the upper end of a wide range that has been in place since the beginning of 2015. A steady climb in expectations for a Fed rate hike next month, have provided a stronger drive than the absolute safe haven status or the certain economic outlook that could provide the currency a growing competitive advantage. The question traders should ask is how much further value this fundamental engine can charge.
In the same period that the Dollar has charged higher, rate forecasts for the a 25 basis point hike at the December 14th FOMC meeting have risen from a sub-70 percent chance to a current 92 percent probability. That is a significant climb considering that no other major central bank is even considering a move to clearly tighten its policy reigns. Yet, at that extreme, there is only 8 percentage points of further hawkishness to price in until we supposedly hit certainty. It is unlikely that the market is willing to accept such certitude given the constancy of a discount over the Fed's own projection and the frequent downgrades the group has made over the past two years for any range of reasons - tepid inflation, China, emerging market debt, slow US and global pace of growth, etc.
Looking ahead, it looks to be a tough environment to both leverage confidence for Fed conditions much less to feel certain of anything. After the US Presidential election, the market now sees President-elect Donald Trump as a force of substantial change and considerable uncertainty for his limited details for policy objectives. Inflation statistics and Fed speakers due this week can help solidify the outcome further, but it will require a greater intensity of hawkishness to mark further progress towards certainty. Furthermore, the dual mandates are less a factor now than market volatility that can easily chase off the Fed's ambitions as they had in the past. In this situation, there is a skew in outcomes and their respective impart on the market. How should we approach this event risk and how could it move the Dollar going forward? That is the focus of today's Strategy Video.
To receive John’s analysis directly via email, please SIGN UP HERE.
