Yikes for hikes if the Fed move faster than expected

As my colleague Joe Perry pointed out, expectations for the Fed to hike by 50 bps at their March meeting rose to around 50% after CPI was released. Yet within hours of the print, traders had pushed the Fed Funds sharply lower to the point this probability rose to a high of 96%. Moreover, traders saw the probability of six 25 bps hikes by the Fed by December by the close of the Day.

Traders began pricing in an emergency intermeeting hike

But, perhaps more interestingly, is that there were also murmurs that the Fed could be forced to hike rates ahead of the next meeting, with some even saying it could be today.

The February contract of the Fed Funds (which expires before the next Fed meeting) priced in a 30% chance of an emergency hike. And when that news did the rounds it seemed to provide investors with another reason to panic, forcing US equity futures down over 2% and the US dollar higher.

Whilst markets are not pricing this in with certainty the fact that they are pricing it in at all does raise a few eyebrows. And, as exciting as an emergency hike may be, there are a few considerations which means it needs to be approached with caution.

Market reaction aside, an emergency hike may be less probable

Critics of the pending Fed hikes point out that raising rates won’t fix the supply-side disruptions that forced inflation rates up to eye-watering levels. And jumping the gun and hiking ahead of their next won’t fix that issue any quicker. But the Fed are at risk of losing credibility if they do act sooner, as it looks like a knee-jerk reaction to the realisation they have lost control. Moreover, they’re still purchasing assets and haven’t even begun tapering, so to hike now would make them look very weak indeed. Therefore, the odds favour a 50-bps hike at their March meeting and sweaty palms for Fed members leading up to it. Yet it is these lower probability events which can cause the biggest reactions, and therefore something for traders to prepare for, regardless.

An early hike could spark panic and weigh on commodity FX

We know that the Fed are going to be raising rates, but the next few days is about deciphering whether they will pull the trigger early, or not. If they do, it could cause widespread panic for markets and benefit the Japanese yen, and weigh particularly heavily on commodity currencies such as the Australian, Canadian and New Zealand dollars. Put simply, AUD/JPY, NZD/JPY and CAD/JPY are ones to watch for bearish setups if they Fed hike early.

Technically, AUD/JPY is a bit of a mess and not one we are too interested in for longs at present. A volatile 2-bar reversal occurred around the 83.75 high and momentum has since broken a lower timeframe, bullish trendline. If prices can stabilise and risk appetite improve, perhaps it can break back above the weekly R2 pivot around 82.30. Yet with sentiment likely to remain fragile, we’d prefer to fade into minor rallies up to 82.30, where a break below 82.70 likely marks a much deeper selloff.

USD/JPY is more appealing to bulls for a March hike

Yet it is not a clean cut with USD/JPY as gain safe haven flows whilst the dollar would be supported by said hikes. We’re currently bullish on USD/JPY on the premise that the Fed don’t hike early, but would revert to a neutral stance if they do.

USD/JPY proved its YTD yesterday and remains in an uptrend on the daily chart. RSI (14) is confirming its recent move higher, although RSI (2) is overbought being above 90, which warns of near-term exhaustion over the short-term. We should also factor in that the weekly R3 and monthly R1 pivot points reside just above yesterday’s high so, unless we see immediate follow-through from bulls today the pair does appear at risk of a pullback from current levels. But if prices can break above 116.50 then we’ll remain bullish up to 117.00 and see how prices react from a long trendline projected form the 1998 high.

How to trade with City Index

You can easily trade with City Index by using these four easy steps:

Open an account, or log in if you’re already a customer

• Open an account in the UK
• Open an account in Australia
• Open an account in Singapore
Search for the company you want to trade in our award-winning platform
Choose your position and size, and your stop and limit levels
Place the trade

This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.

StoneX Financial Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the StoneX group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), StoneX Financial Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact StoneX Financial Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.

In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither StoneX Financial Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.

StoneX Financial Pte. Ltd. is not under any obligation to update this report.

Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit www.cityindex.com/en-sg/terms-and-policies for the complete Risk Disclosure Statement.

ALL TRADING INVOLVES RISKS. LOSSES CAN EXCEED DEPOSITS.

City Index is a trading name of StoneX Financial Pte. Ltd. (“SFP”) for the offering of dealing services in Contracts for Differences (“CFD”). SFP holds a Capital Markets Services Licence issued by the Monetary Authority of Singapore for Dealing in Exchange-Traded Derivatives Contracts, Over-the-Counter Derivatives Contracts, and Spot Foreign Exchange Contracts for the Purposes of Leveraged Foreign Exchange Trading. SFP is also both Derivatives Trading and Clearing member of the Singapore Exchange (“SGX”). SFP is a wholly-owned subsidiary of StoneX Group Inc.

The information provided herein is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to invest, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently, any person acting on it does so entirely at their own risk.

The information does not represent an offer of, or solicitation for, a transaction in any investment product. Any views and opinions expressed may be changed without an update. To understand the risks and costs involved, please visit the section captioned “Important Information” and the “Risk Disclosure Statement”.

The information herein is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

StoneX Financial Pte. Ltd. 1 Raffles Place, #18-61, One Raffles Place Tower 2, Singapore 048616. Tel: 6309 1000. Co. Reg. No.: 201130598R.

This advertisement has not been reviewed by the Monetary Authority of Singapore.