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Fed hike: Why still not fully priced in? - Westpac

FXStreet (Delhi) – Sean Callow, Research Analyst at Westpac, suggests that the main question around the FOMC’s decision on 16 Dec now seems to be why it isn’t fully priced in?

Key Quotes

“Market pricing has lingered around 72-75% in recent days despite admirably clear Fed commentary. Fed chair Yellen said “economic and financial information received since our October meeting has been consistent with our expectations of continued improvement in the labor market.” She added that when the FOMC starts to raise rates, “doing so will be a testament...to how far our economy has come in recovering from the effects of the financial crisis and the Great Recession.”

Centrist presidents of the San Francisco and Atlanta Feds John Williams and Dennis Lockhart respectively said that a rate rise should be “sooner rather than later” and that the case for action is “compelling.” Perhaps investors are waiting for Friday’s employment report or perhaps the memory of the FOMC’s late change of mind in Sep means traders don’t want to price in a 90%+ chance until just ahead of the meeting, just in case.”

“Admittedly US data has been mixed. As Richard wrote in “Cooler US data trends shouldn’t upset the USD too much vs majors” (2 Dec), Q4 GDP estimates are under pressure amid a steady run of weaker activity data including business surveys such as the Nov Chicago and ISM PMIs, the Nov Michigan and Conference Board consumer confidence indices and Oct personal income and spending, to name a few. It has not been all one way though. The latest new home sales, core capital goods shipments, ADP private payrolls and initial jobless claims data portray healthier trends.”

“Yet as Yellen indicated this week, “progress” towards the Fed’s twin goals on employment and inflation is key. Even if Nov payrolls disappoints, it is hard to see the FOMC being swayed from a hike that they give every impression they want to get out of the way and turn the conversation to the profile of the tightening cycle.”

“Here is where the implications for USD are rather mixed. At the moment markets are only pricing a funds rate of 0.60% by June 2016, with 2x25bp hikes only fully priced by July. So while confirmation of the start of a tightening cycle must lend some support to USD when contrasted with easing biases elsewhere, it is fair to question whether such support is already embedded.”

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