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Fed Funds Futures

Written by A Forex View From Afar on Monday, April 21, 2008

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Fed Funds Futures, the market's view of the future FOMC interest rate decision, are starting to price a smaller rate cut (compared with the last meetings) of 25 points, to 2%

Fed Funds Futures April expectations

It is interesting that some traders are starting to see the chance of no rate-cut for the next FOMC meeting, which will be held next week. At this point in time a 'no rate-cut' has the same possibility as a '50 points cut'; of 10%. There is an 80% possibility of seeing a 25 points rate cut.

Going forward the same traders are a little confused when referring to the June meeting outcome it would seem. First pricing in a 60% chances of a drop to 1.75% rate on Feds Funds, and then reversing that with a 2.00% rate expectation on the same Fed Funds. Now the possibilities are almost equal for 1.75, 2.00 and 2.25 for the June meeting. In other words; no idea.

On a technical note, June expectations are following April's expectations. It's safer to wait for next week rate decision than to build a position based on June expectations it would seem. Those that are steering the Fed Fund Futures ship are lost in a fog.

Fed Funds Futures June expectations

Even if the Fed's recent story sounds a little strange; starting with a 50 point cut, then 25, then 50 and 75 points rate cuts in unscheduled meetings , what the market sees is a small 25 point cut, if anything at all.

All this could be translated into bigger (and more often) Dollar bounces days, against the weaker pairs, like Cad and the Pound (which we can see at this point in time).

It seems pretty certain that there will be a sniff around up above 1.60000 on the Euro. The markets really look to want to have a test, and probably a break of, that resistance; but with traders pricing in a Fed that wants to beat inflation all of a sudden, there are some question marks. Reality however soon hits home; A Fed that wants to choke inflation? Well, how can they do that with an imploding Housing market, a lose labor market, and consumer confidence hitting low levels? The Fed held rates for a long time in an effort to fight wage inflation, so they stated, how can rates now be raised in an effort to tackle inflation when the economy is still absorbing the savage cuts that really still have 6 months to filter into the markets.

It is remarkable that as financial markets start to speak more about the Fed worrying about inflation, the more we see the ECB members jawboning about their "no rate cut perspective", "rate hike expectations" ,"inflation fear", and "growth is safe, inflation is our biggest worry". Surely the ECB Members know what drives the FX pairs; Business Cycles (currency appreciation), and Spread/Swap Interest payments. Neither of which leads many Trade Desks to want to be Long Eur/Usd for anything other than a Dollar Bounce Day.

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  1. 1 comments: Responses to “ Fed Funds Futures ”

  2. By Anonymous on April 22, 2008 at 1:38 AM

    at a certain time, the Fed must see inflation as a threat. Wonder when that time will come?

TheLFB Team & The View From Afar Blog

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Fundies and Trading
There is a constant question from some traders as to why anybody would ever need to consider the ‘F’ word when trading. Fundamentals: what is so damaging at looking at both Technical charts and having a Fundamental filter to gauge how many Lots to put on? Why is it that accepting that Technicals give us price points to trade, but Fundamentals determine the direction that we travel is so difficult for some traders to accept? Without a Fundamental Filter very few pure Technical traders would have seen this Dollar move coming today.

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