The main theme in the FX market today is US dollar weakness. The trend began almost right from the open in Asia-Pacific tradign and has been ebbing and flowing with no real moves since then.
The driver is Fed expectations.
The Fed is worried about 6 things:
- Slowing global growth
- Europe stumbling
- A stronger dollar
- Lower oil/commodities
- Signs of weakening inflation
- No signs of accelerating wage inflation
Policymakers have begun to voice louder concerns and now the market is expecting a slower pace of rate hikes, or none at all. What’s notably missing from the list is jobs. That picture has improved but the Fed has moved the goalposts toward other metrics, especially inflation.
This is key:
Here is what Fed fund futures are pricing today compared to Sept 17:
Fed fund futures today
Fed fund futures Sept 17
The chance of no rate hikes by July has risen to 31.8% from 10.5% (this actually underestimates the probability because the Fed is between 0-0.25%)
The chance of rates hitting 0.75% has fallen to 4.0% from 28.7%.
If a core member of the Fed starts talking about hikes, this could turn back around in a hurry.