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From the Floor: Markets pricing in March US rate hike — #SaxoStrats

  • Market expectations of March US rate hike have risen to around 2/3: Hardy
  • Hawkish remarks from Fed's Dudley further bolstered March hike view
  • Markets are basically now pricing in a March hike: Hardy
  • US president Trump's speech met with relief, though tax plans still vague
  • Core bonds, gold and JPY fell in response to Trump's speech
  • Treasuries fell probably more due to Fed news than to Trump's speech: Boye
  • US 10-yr is up to 2.41% from bottom of trading range at 2.3%, could target 2.5% 
  • Bunds drop in sympathy with US Treasuries
  • France-Germany spread back to 64 bps, with Macron emerging as frontrunner
SaxoStrats banner
By John Acher

Market expectations of a US Federal Reserve interest-rate hike in March have leapt to around two-thirds from less than 40% last week, and hawkish remarks on Tuesday from New York Fed president William Dudley further bolstered that view.

Dudley, a voting Fed policymaker, said the case for raising US rates has become "a lot more compelling" since the November election due to rising confidence and expectations for fiscal stimulus.

“There's no question that animal spirits have been unleashed a bit post the election,” he said in an interview on CNN International on Tuesday, before US president Donald Trump spoke in Congress. Dudley’s remarks added to a recent chorus of Fed speakers who have ratcheted up expectations of a March rate increase.

“We have seen fairly consistent hawkish noise coming out of the Fed,” says Saxo Bank’s FX strategy chief John J Hardy. “It sounds like they want to keep the March rate-hike odds higher. They like to hike only if the market appears well prepared for it.” (See also Hardy's FX Update.)

Various different rate-hike probability figures have been floated by different providers – according to Bloomberg it now stands at 78% – depending on the method of calculation.

“Let’s call it two-thirds probability of a hike, up from only a little over a third just some days ago – so we are basically pricing in a March hike,” says Hardy, adding that a firm reading for US personal consumption expenditures inflation due at 1330 GMT on Wednesday could seal a March rate rise.

The market estimate for the PCE inflation figure is 1.7%, while 1.8% or especially 1.9% would be a strong reading, Hardy says.

President Trump’s speech to a joint session of Congress on Tuesday (early Wednesday European time) was described by media as restrained and even “presidential”, in contrast to his earlier harsh rhetoric.

The speech met with relief in financial markets though it was still vague on the new US administration’s tax plans.

Trump’s speech recycled many of the themes he has talked about before, Hardy says. “But […] it sounded like he supports some form of border tax adjustment, so, all things being equal, that is dollar-supportive.”

Asian equities and the US dollar strengthened, while gold, the Japanese yen and core bonds fell during Wednesday’s Asian session in response to Trump’s speech, reflecting an easing of risk sentiment.

XAUUSD - gold prices fell in a wave of relief after Trump spoke
Gold prices
Source: Saxo Bank 

“The market seems to be happy about the commitment from the president even without further details being laid out,” says Ryan Wu at Saxo Bank’s Singapore hub.

But Saxo Bank fixed-income trader Michael Boye says the drop in US Treasuries stemmed perhaps more from Dudley’s remarks than Trump’s.

The US 10-year yield rose to 2.41%, up from the bottom of the trading range at 2.3%, and it could possibly target a move to 2.5% next, Boye says.

Bunds dropped in sympathy with US Treasuries, and the tone in the government bond markets has eased more broadly. The Germany-France spread has narrowed back to 64 basis points as the independent candidate Emmanuel Macron has emerged as the frontrunner in France’s presidential race, calming fears of an upset victory by the anti-immigration populist candidate Marine Le Pen.

US Treasuries fall, yields climb
Source: Bloomberg and Saxo Bank 

Japan led Asian stock markets higher, with the Nikkei up 1.4%. Electronics companies and automakers were the biggest gainers.

China’s manufacturing PMI climbed to 51.6 in February, beating an average market expectation of 51.2 and up from 51.3 in January, while the non-manufacturing PMI was lower. The Chinese official data provided further confirmation of improvement in factory activity.

“The data will give top officials about to gather in Beijing a solid economic backdrop as they seek to control financial risk,” Wu says.

USDJPY survived a local support test at 111.60, and an Ichimoku cloud test at around 112.35 yesterday, and has now rallied. 

“So that is key support surviving US rate odds and rates themselves headed higher,” says Hardy. “The next big level is 115 […] – so this is going to be a big test if we see continue to see the dollar and rate odds picking up from here.” 

USDJPY survives key support test
Source: Saxo Bank 

AUDNZD has been tested 1.0750 numerous times. “We are looking for a potential break,” Hardy says.

AUDNZD - one of the more interesting technical setups in play at 1.0750
Source: Saxo Bank 

US Capitol building
 US president Donald Trump's speech to Congress was described as 'presidential' 
and was met with relief in financial markets. Image: Shutterstock

John Acher is a consulting editor at TradingFloor

Editor’s note: From the Floor takes advantage of's unique real-time access to Saxo Bank’s various trading desks around the globe to put our community in touch with the developments that matter to their portfolios 


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