Fed hike bets creeping back

Fed rate hike bets are back on the table after hawkish Atlanta Fed president Lockhart added his voice to his colleagues Bullard and Williams. 

Capitol Hill
Source: Bloomberg

Essentially, their comments built up hopes that the US central bank will still raise interest rates by end of the year.

The US dollar is now back at pre-FOMC levels, as it strengthened against most major currencies. The dollar index is still testing the 100-day moving average at around 95.90. In my trade idea, I mentioned there is an opportunity to go long on the greenback as the post-FOMC dip was shallower than expected.

While the trade(s) seemed to be working out, it is important to wait for a break above the 95.90 resistance. EUR/USD cleanly broke below the 1.1214 support, which could see it heading for 1.1090. However, it needs to clear the 100-day and 50-day moving averages at 1.1150 and 1.1128.

How much higher the dollar can run depends on the conviction of the traders. Market pricing of a December move is increased by a few percentage points from 46% to 49%, but is not significant enough to cause a shift in view. US equities also gained modestly, suggesting that market participants are still cautious about re-entering a rate hike trade.

Mr Lockhart’s comments are in line with his vote (rate hike at September), so there is really nothing new. I feel that what will be a stronger impetus will be strong data or at least stronger-than-expected data out from China. This would come from the private sector manufacturing PMI due on Wednesday.

The consensus is for another contractionary reading at 47.5, so any number above this would be taken as a positive. However, to move market sentiments, the reading needs to be materially higher.

In the meantime, the underlying cautiousness is likely to underpin trade in Asia today, amid a quiet data calendar. Nonetheless, we could see some demand in Asian equity markets, according to the futures markets.

There may be some focus on China president Xi’s first state visit to the US. Some of the gains in Chinese markets yesterday were attributed to rallies in industrial and technology counters, which was driven by speculations of business deals between US and China during the visit.

 

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