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After initial FOMC projections cut jolt, rate hike odds were fast forwarding towards June as FOMC projected two rate hikes this year. So which could be the best month to increase rates than June if the hikes to be gradual.
However, On Tuesday, FED chair Janet Yellen’s dovish comments reduced rate hike odds this year and now no rate hike expected even in November and only one in December.
She cited reduced toolbox as one of the key factors in her dovish bias, FED has now limited scope to boost economy, with rates being just one hike above zero.
Let’s review the hike probabilities over next few meetings –
Current FED funds rate stands at 0.25-0.5%
- April, 2016 meeting – Market is attaching 95% probability that rates will remain at 0.25-0.5% and 5% probability that there would be 25 basis points hike.
- June, 2016 meeting – Market is attaching 77% probability that rates will remain at 0.25-0.5%, 22% probability that rates will be at 0.5-0.75% and 1% probability that rates will be at 0.75-1%.
- July, 2016 meeting - Market is attaching 65% probability that rates will remain at 0.25-0.5%, 31% probability that rates will be at 0.5-0.75% and 4% probability that rates will be at 0.75-1%
- September, 2016 meeting - Market is attaching 57% probability that rates will remain at 0.25-0.5%, 35% probability that rates will be at 0.5-0.75%, 8% probability that the rates will be at 0.75-1% and only 1% probability that the rates will be at 1-1.25%.
- November, 2016 meeting - Market is pricing 53% probability that rates will remain at 0.25-0.5%, 36% probability that rates will be at 0.5-0.75%, 9% probability that the rates will be at 0.75-1% and only 1% probability that the rates will be at 1-1.25%.
As of now, market is still pricing one hike but that almost in June.
We are maintaining our view that Dollar will not be able to benefit much even if FED hikes in June as that still would be lower than original expectations back in early 2015. Moreover inflation is likely to return globally, reducing the policy gaps among central banks.
We expect Dollar to weaken in the medium term. However, Dollar may find support from Brexit fear and fast forwarding of rate hikes.
Dollar index is currently trading at 94.98, up 0.15% for the day.
