Fed hike: September candidate; but Fed Fund futures pricing January - Kicklighter, DailyFX

   John
Kicklighter

PROFILE:
• Current Job:  Senior Currency Strategist for FXCM in New York.
• Career: Graduated from the Zicklin School of Business with a Bachelors degree in Finance and Investment. Specialized in combining fundamental and technical analysis with money management.

View profile at FXStreet

John Kicklighter is the senior currency strategist for FXCM in New York where he specializes in combining fundamental and technical analysis with money management. John authors a number of regular articles for DailyFX.com, ranging in topics from basic fundamental forecasts for the G10 economies and commodities to more complex subjects like the level of risk sentiment across the financial markets and the carry trade specifically.

John has actively traded since he was a teenager. His experience ranges from spot currency, financial futures, commodities, stocks, and options on all of these instruments for his personal accounts. John graduated from the Zicklin School of Business at Baruch College in New York with a Bachelors degree in Finance and Investment.

The EUR/USD is consolidating levels below 1.1000 and even 1.0900; How far could the EUR/USD go this time? Parity?

Having dropped from 1.4000 to 1.0500, EURUSD has already covered considerable ground and subsequently priced a broad disparity in interest rate expectations between the ECB and Fed. Data and Fed rhetoric that reinforces a 2015 hike and moves it ever closer will favor the Greenback, but the progress will likely be slow until it is clear that the liftoff is less than two months out. A stronger catalyst with a deeper well of untapped potential would be a sudden fissure in Greece's financial markets. Despite policymakers' assurances, contagion risk from this troubled EZ member remains high.

Janet Yellen said it is likely the Fed will hike rates in 2015; but at the same time, FOMC minutes showed officials discarded June meeting; Will September be the turning month? When will the Fed hike rates?

From a strategic perspective, the most convenient time to move on monetary policy is during one of the quarterly meetings (June, September, December) as it provides a natural platform for more feedback from the central bank in updated forecasts and Chairwoman Janet Yellen's press conference. A June hike is a low probability given the lull in growth through the past month and the lack of imminent inflation pressures. If 2Q GDP recovers quickly and price pressures gain genuine traction, September is a likely candidate for the 'early start and shallow curve' policy path. As it stand though, Fed Fund futures are still pricing a first move much further out in January of next year.

When do you think the BoE will turn to a more hawkish stance and begin hinting at a possible interest rate hike?

The market has not given the Bank of England its due respect for its subtle but consistent hawkish lean. Speculators have latched on to the Fed's rhetoric and its insinuation of an earlier hike than the market is accounting for. However, the US central bank didn't pilot this stance. The BoE has remained remarkably consistent about its view that a hike will be realized in the not-too-distant future. Given short sterling futures, a discount is for a first move in the first to second quarter. However, if headline inflation picks up in the UK and abroad, that first move will happen much earlier. And, compared to the Dollar, the Pound is even further out of alignment to a timely policy move.

Do you think GBP/USD will head lower to sub-1.50 levels in the foreseeable future?

If there is one major that stands a better chance of gaining ground consistently against the favorable interest rate view of the Dollar, it would be the pound supported by its comparable rate bearing. Everything being equal, the cable will likely develop a broad range. Yet, things will not remain equal. If the Dollar can build conviction into NFPs and other key data, GBPUSD may be able to slip back below 1.50 while the Greenback gains broadly.

Grexit and Brexit: What effect can these two subjects have on the EUR/GBP?

The Greek exit will cause a considerable amount of uncertainty - whether orderly and a political decision or abrupt and accidental. The Euro would certainly suffer for it one way or the other. A withdrawal for the UK from the European Union is not seen as imminent. The referendum is not likely until 2017, support has not taken root and the variables are too nebulous for it to seriously undermine the system. That said, should it eventually be realized, the EURGBP will general grow more volatile as the trade relationship dissolve.

The USD/JPY is trading at highs since 2007, do you see the rally breaking these highs and pricing above 125.00?

As with US equities, momentum can be self-reinforcing. With the USDJPY breaking key resistance after an extended period of consolidation (the break was overdue), speculators are happy to find justification in the meaningful policy divergence between Fed rate speculation and the BoJ's steady QQE execution. That said, Yen crosses are running on borrowed time. USDJPY has retraced two-thirds of its lowest from 1998 to 2011 even though its yield has barely budged. This intensifies the dependency on buoyant risk appetite trends. Should they falter, these high-flying and low-paying FX outlets will be the most exposed. And, we are well overdue for a purposeful retrenchment.