Fed Rate Hike Odds Increase; BOC, BOE May Odds Drop -

Fed Rate Hike Odds Increase; BOC, BOE May Odds Drop

Mar 02, 2018Jeremy ParkinsonFinance0

FOMC MARCH HIKE ODDS HOLD AT 100%; JUNE ODDS EDGE HIGHER

Rate hike odds for the Federal Reserve’s March meeting remain at 100%, so we’ve turned our attention further down the glide path to see what market participants think. Even as the odds of the second (June) and third rate hikes (by November) in 2018 have been pulled higher in recent days – no doubt due to the perceived hawkish commentary from new Fed Chair Jerome Powell – the US Dollar still doesn’t seem that motivated to rally.

It’s worth repeating that this may be evidence of a ‘regime change’ taking place in financial markets. Whatever the true reason may be, the fact is that traders are no longer looking at a more aggressive rate hike path from the Fed as a de facto positive for the greenback.

Chart 1: DXY Index versus June FOMC Rate Hike Odds (October 2017 to February 2018)

In 2018, the US Dollar has shrugged off the climb in hike odds, although the relationship has become less negative in recent weeks. With June rate hike odds hitting 66% today, the 20-day correlation with the DXY Index has increased to -0.03. On January 30, the 20-day correlation between the DXY and a second hike in June was -0.82.

BOE MAY HIKE ODDS STAY ABOVE 60% BEFORE BREXIT HEADLINES RETURN

Last month, the Bank of England’s Quarterly Inflation Report allowed for policymakers to begin talking up the possibility of a rate hike coming in the first half of 2018. Despite the fact that British Pound is up year-over-year against a basket of major currencies, inflation remains stubbornly high near +3%, and BOE officials believe that price pressures could remain elevated given the backdrop of rising energy prices.

Chart 2: GBP/USD Spot versus May BOE Rate Hike Odds (October 2017 to February 2018)

Even though there is no significant correlation between hike odds and GBP/USD (20-day is -0.41), it appears that the Sterling priced in the jump in probability early: the 20-day correlation, factoring in a two-week lag in hike expectations, rises to +0.12. In our last update, it is worth noting that the two-week lag 20-day correlation was +0.52, suggesting that the BOE is having less of an influence. Current May hike odds sit at 62%.