Rate Hike Expectations Finally on the Rise

European equity markets are deep in the red on Monday, catching up on moves in the US on Friday and Asia overnight as investors come more around the possibility of a rate hike this year, possibly even as early as this month, although that remains a long shot.

We heard from three Fed policy makers on Friday, two of which – Daniel Tarullo and Eric Rosengren – are voting members on the FOMC this year and the message that investors took from them is that a hike is much more likely than is currently priced in. I don’t think the comments themselves were particularly hawkish or indicate that a hike is nailed on but perhaps the cumulative effect of the number of policy makers now hinting at one this year is finally getting the message through. The mixed message has often been a problem for the Fed in the past.

FedWatch

Source – CME Group FedWatch Tool

EUR/USD – Euro Subdued as Markets Search for Cues

Should we continue to get a consistent hawkish message from policy makers ahead of the blackout period, we could see the implied probability of a hike in September ramp up considerably which based on the moves since Friday, would be bad news for equity markets. US futures are pointing to another negative open on Wall Street at the start of the week which could see technical support in the S&P 500 – around 2,110-2,120 – and Dow 30 – around 18,000 – come under pressure. A break below here could be quite bearish for the indices.

Dow Daily

S&P Daily

OANDA fxTrade

The catalyst for this could once again come from Fed policy makers, with Lael Brainard, Neel Kashkari and Dennis Lockhart all scheduled to speak. Brainard’s comments will be of particular interest as she is the only voter on the FOMC this year. Further hawkish commentary and any indication that a rate hike is likely could trigger another wave of repricing for September and December, which in turn could see the dollar and Treasury yields on the rise again and equities coming under pressure. It’s also worth noting that Brainard is among the more dovish members of the Fed.

US Rate Hike Jitters Grip Markets

Commodities are also sensitive to changing rate hike expectations and have been quite volatile at the start of the week, with Gold, Silver and Oil down on the day. A stronger dollar which often comes with an increasing rate hike probability is bearish for commodities, particularly Gold, as it makes them more expensive to holders of other currencies. Oil is also sensitive but there is also plenty of other factors at play here. Brent and WTI have recovered from the shock of a substantial drawdown in inventories last week and a new “cooperation” between Saudi Arabia and Russia on production. The reversal on Friday suddenly makes them look much more bearish than they looked following the release of the inventory data.

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Craig Erlam
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the BBC and The Telegraph, and he also appears regularly as a guest commentator on Bloomberg TV, CNBC, FOX Business and BNN. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.