U.S Rates Within Touching Distance Of Neutral, Traders Slash Bets On Rate Rises

Signs of a slowdown in global growth overseas, mixed U.S inflation readings and overall damage from prior tariff increases has taken some gravity away from cases to tighten U.S borrowing costs. With that being said, traders have now slashed their bets on Federal Reserve rate rises after comments from Fed officials this week.

On Thursday, Raphael Bostic, president of the Atlanta Federal Reserve Bank, suggested that the central bank may not have to lift interest rates much further. He contended the Fed is currently within “shouting distance” of the neutral rate level, a level that neither stimulates or restrains the economy from growth. He added “I do think neutral is where we want to be”. 

St. Louise Federal Reserve bank president James Bullard, who is also an upcoming voter on interest rate decisions mirrored the same tone by saying U.S monetary policy is at a turning point. Bullard stated “Inflation is low and looks to be very stable” adding that the recently narrowed yield curve which, may be signaling market concerns of being too hawkish, will also give the Fed reason to pause on rate rises.

Traders followed these announcements and slashed chances on the Fed’s next interest rate decision due on the 19th this month to only a 67% chance of a hike, down from over 80% in mid-September. Should the Fed push through with their initial plan of 3 quarterly hikes in 2018, the markets are pricing in a mere 36% chance that the Fed only lifts rates once in 2019. 

The central bank’s median forecasts which released in September, stated the central bank sees three rate rises next year should data continue to prove positive. However, markets are only pricing in a 4% chance that they fulfill the forecasts. 

The dollar index shows that price has attempted four drives to break the 97.00 daily resistance level however falling short with sharp reversals back below. Now that the trendline has been broken price can revisit the next support level for the dollar, the 96.00 price region. From the current market price, that’s a potential drop of 0.71% against a basket of currency pairs over the coming weeks..

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