Sagging Fed expectations

As discussed yesterday, markets will increasingly obsess about the US election over the coming few weeks, but beneath that the economy will determine if the Fed hikes interest rates before the year is out. After the last meeting, the chance of an increase in rates by year end was out over 60%, with that reading having now decreased to 50%. This shift in expectations has, in part, underpinned the weaker dollar seen over the past few sessions. For all the headlines about the election, the Fed is focuses on the economy and the messages on that have been mixed since the Fed meeting. It also has to be said that whilst the election result looks to be so close, the market will struggle to fully price in an US rate increase by year end. A Clinton victory could seal it, whilst the uncertainty caused by a Trump win could well reduce the chances of a December move. Like it or not, politics and economics are going to be ever more interlinked in this scenario. Leaving all that aside, the calendar for today is on the light side, with just US durable goods data at 12:30 GMT.

Note that we have some speakers in the form of ECB’s Draghi at 09:00 GMT, together with BoE’s Shafik just after 08:00 GMT. Oil prices are sagging below the USD 45pb level as expectations are downplayed by the Saudi’s ahead of the OPEC meeting in Algiers. There are signs of ground being gained in terms of accepting higher output elsewhere, which is why the oil price has sagged, but a significant push lower looks unlikely for now. Sterling continues to flirt with the 1.30 level on cable, whilst USDJPY is also having a torrid time with the 100 level.