March US Rate Hike Likelihood Surges, Pulling Dollar Higher

Andamento del mercato - 01/03/2017

With the next FOMC decision just two weeks away, the probability of another 25 basis point increase surged higher yesterday, extending gains after President Trump’s speech before the US Congress.  Even though the second iteration of gross domestic product figures released on Tuesday fell short of expectations, which were 2.10% annualized growth for the fourth quarter they nevertheless remained stable, helping build the Central Bank’s case.

Adding to the optimism was the Fed’s preferred gauge of inflation, the Personal Consumption Expenditures Price Index, which was released earlier in the session.   The headline annualized figure printed at 1.90%, just shy of the Federal Reserve’s 2.00% target while the core figure stayed on hold at 1.70% for the 12-months through the end of January.  The reaction in financial markets over the last 24 hours has been notable, evidenced by the rapid increase in the number of investors pricing in additional monetary tightening.

After sitting at just a 35.40% probability just a day earlier, the CME Group’s FedWatch Tool, which tracks the likelihood of interest rate adjustments, is now pricing in a 68.60% chance of a 0.25% increase in the Federal Funds rate at the meeting scheduled for the middle of the month as of 15:30 GMT on Wednesday.  This significant departure from earlier concerns about the pace of US rate hikes has been aided in large part by hawkish commentary from key Fed members.

New York Federal Reserve President William Dudley was on record Tuesday, highlighting the increasingly “compelling” case for raising interest rates after months of steady above-trend growth and strong job creation.  With the exception of St. Louis Fed President James Bullard, who called for balance sheet reduction, Fed members Williams, Harker, and Kaplan echoed Dudley’s viewpoint on Tuesday, adding to the bullish dollar sentiment.  The result has been tumbling precious metals prices as gold falls firmly below $1250 with the next major support sitting at $1220 per troy ounce.

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