After today’s economic data (which wasn’t that bad), there’s been a big shift in Fed expectations
We’ve had quite a change in the hike odds since the data today. BBG sees Dec at 61.0% vs 72.4% pre-data. RTRS is now 70.4% vs 75.6% prior. The bigger story is that the 2019 outlook looks very bleak with hikes pretty much priced out. There’s just a 2% chance seen of rates being 3-3.25% by Dec 2019.
A lot of the reaction is happening in bonds rather than FX, the reason being that FX has had the Fed priced pretty well for over a year now. You’ll recall how little action we’ve seen on Fed meetings this year.
We can expect to continue to see FX pulled around by changes in the curve but unless it starts becoming volatile, we’re unlikely to see any big moves.
On the flipside, the market’s neutral view of the Fed now shifts the bigger price risk for USD to the upside. The Dec FOMC could actually bring a big reaction in USD if they stress that the 2019 path is still fully expected and likely. If they do the opposite and confirm the market’s fears, we’ll see further shifts across markets. Given the market’s view right now, my early thought is to look to go long USD a couple of days before the FOMC on the basis that they still hike. I think the Dec odds are very under priced.
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