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Fed Funds Futures: A rate increase may be in the books

Written by A Forex View From Afar on Saturday, June 14, 2008

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Fed Funds Futures point to the markets starting to price in a rate increase from the Fed by August. The main component that added to the view of an increase were the U.S. CPI numbers that came in inflationary, bumping the chances of the August meeting outcome for a rate increase to 60%, up from 9% one month ago.

Fed Funds Futures June outcome

At this point in time the markets are seeing a rate increase of 50 basis points as having the same possibility as a 25 basis points rate increase. This is a big shift in policy for the Fed, thinking that just a back in March the Fed cut 75 basis points.

Fed Funds futures august outcome: a rate increase may be here

The markets have certainly adjusted to the new inflation fighting outlook, having s strong surge of dollar buying after Mr Bernanke adjusted the FOMC stance, and adding that last month's economics signaled to him that the worst of the economic pull-back is behind us. Bonds were immediately sold, dragging the yield on the 10 year treasury bond up to 4.25%, from 3.92% last month. The yield on the two years note, which is the most sensitive to changes in monetary policy, rose 65 basis points in the week, the most since 1982.

With treasury yields going up the dollar posted the biggest weekly gain in the last 3 years against the euro and in 4 years against the yen. The euro lost more then 350 pips in the week while the yen posted a similar gain, but in order for the dollar to appreciate further it first has to break the 1.53 area on the euro and the 108 area on the yen. Volatility is expected when the dollar tries to take out these levels.

As long as the Fed keeps an eye on inflation the dollar will get bought against most of the major pairs. What is needed now is the CPI to catch up reality and actually reflect the higher prices we are dealing every day. Who knows, maybe the greenback days are here, we will have a signal to get long the dollar for more than just a day trade when oil heads towards $120 a barrel and we see GDP growth numbers.

The trade team reported two weeks ago that they felt a base was in place on the dollar index at 71.50, the next area topside to break and hold will be 74.00, and once that has been traded around for a few sessions we will be looking for a test of 75.00. All-in-all it looks as though the oversold greenback is attracting trade desk interest, but they will do all they can to keep from signaling the fact that they are buying the Usd. we are seeing a swing point it seems.

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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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