Investors still believe the Fed could hike rates in 2020
Investors bet on the fact that the Federal Reserve will keep interest rates unchanged in the next FOMCs, as showed by the CME FedWatch. The FedWatch calculates the implied probabilities assigned to a range of target interest rates for all upcoming FOMC meetings. The euro appreciated again against the dollar, rising above 1.1, following some positive data on the Eurozone economy.
For the next FOMC (11 December), investors attribute a probability of 94.8% that the fed funds are in the current range of 150-175 basis points, an increase compared to last week’s value (91.1%) and a 5.2% probability that they will be in the range of 175-200 basis points, down from 8.9% in the previous week. The probability of a 25 basis point cut remained equal to zero.
For the first FOMC of 2020 (29 January), investors attribute an 88.9% probability that the fed funds are in the current range of 150-175 basis points, an increase compared to the value of last week (82.0%) and a probability of 4.8% they are in the range 175-200 basis points, down compared to 7.9% in the previous week. The probability of a 25 basis point cut instead dropped to 6.3%, from 10.1% in the previous week.
This week, the interval showing the highest modal value is that of 150-175 basis points for the upcoming FOMC meetings. Investors predict that the Federal Reserve will keep interest rates unchanged at the current level, but the probability that interest rates will change, in particular that the monetary policy position will become more accommodating, has changed, with the distribution of the probability that is moved to a more hawkish stance. This should help the dollar to strengthen against the euro, ceteris paribus.