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It’s all about tomorrow: Today would be the start of a 2-day FOMC meeting which will deliver its verdict after the US has released CPI and retail sales figures tomorrow.
The Fed Funds futures market prices a 25bp rate hike with a strong degree of confidence, but it’s a lot less sure about what happens after that. Another 18bp hike is priced in for the end of the year, then 26bp for 2018 as a whole and 18bp in 2019.
The pricing of end-2019 rates has come down by 25bp since the start of the year, even as pricing for 2017 has risen. The Fed’s insouciance about market pricing for the peak of the rate cycle, along with the fall in wage growth and inflation since the start of the year, is behind both the dollar’s relative softness, and markets’ overall buoyancy. A ‘dovish hike’ would sustain both these trends, while anything that moves the end-2019 rate expectation upwards is likely to help the dollar and sound (minor) alarms for EMFX investors.
The only Eurozone data this morning is the ZEW survey, which I have never found much value in but which will probably echo the general upbeat economic mood. That alone doesn’t warrant a response from the euro, which can mess around in a USD 1.1150-1.13 range for a bit longer before breaking higher (though it needs to hold the bottom of that range to keep EURUSD in its upward-sloping channel).
For today, the US dollar and interest rates were fairly stable, with no major events to ruffle markets. US 10yr treasury yields ranged sideways between 2.19% and 2.22%, while 2yr yields rose from 1.34% to 1.36% - a one-month high. Fed fund futures yields continued to price a 14 June rate hike as a 100% chance, but a further hike is not priced until mid-2018.
