This Is Why A Rate Hike Isn’t That Important
The FOMC is due to meet next week and by all accounts they are expected to raise rates. While a rate hike will be a dollar-positive event it is most likely already baked into the market expectation and may not produce a rally. The news that may spark a rally, or a decline, will be the committees view on future rate hikes. The policy decision is due out next Wednesday at 2PM (-5 GMT) with a press-conference scheduled for after.
The CME’s FedWatch Tool, a gauge of rate-hike expectations based on the Fed Funds Futures contracts, shows a 100% chance of hike at this week’s meeting so there is little doubt one is on the way. The tool also shows a growing chance of a fourth hike in 2018, to 225 basis point or 2.25%, an event that has been debated since the first of the year. The question now is how many hikes will there be in 2019?
The FedWatch Tool is showing about a 50% chance for four rates in total by next October, regardless of what they do next week and at the December meeting. The market will be reading the FOMC policy statement and hanging on to every word spoken by Jerome Powell at the press-conference following. The recent economic data shows U.S. inflation growth is contained, if the FOMC gives any indication they are backing off their rate-hiking timeline or have lowered the upper target for interest rates the dollar could see a massive sell-off.
Potential for a dollar sell-off is also brewing in foreign currency. Both the ECB and BOE have indicated a need for future rate hikes and within the next 12 months. The ECB may not act on their plans until the third quarter of 2019 but the BOE is sure to act much sooner than that. Consumer level inflation data from the UK showed a strong gain and acceleration above expectations which is cause enough for the BOE to act.
The Dollar Index is poised to fall although it is also showing signs of support at the $94 level. The $94 level has been an important pivot level for many years and is likely to produce a significant move regardless of the direction. The indicators are bearish and support a move lower, all the index needs now is a push to new lows to get the selling started. Additional catalysts exists as well, including but not limited to trade relations. As trade relations and fear of trade war simmer down risk-on appetite could help fuel the dollar’s decline.