Markets have almost fully priced in a third hike for 2017 in December - BBH

Eren Sengezer FXStreet

"Firmer US data and official comments have led markets to recalibrate their Fed tightening expectations," BBH economists noted in a recent report.

Key quotes:

"The US 2-year yield of 1.56% today is the high for this cycle and the highest since October 2008. The US 10-year yield moved close to 2.0% last month but has since turned higher and moved close to the May/June high near 2.40% and stand at 2.34% today."

"Markets have almost fully priced in a third hike for 2017 in December. Yet, only one hike is currently priced in by the markets for 2018 followed by less than one more in all of 2019 and 2020 combined. The latest Fed Dot Plot sees one more hike in 2017, three in 2018, two in 2019, and one in 2020. The Fed Funds futures strip shows that the market still does not fully believe the Fed. EM FX is likely to come under pressure if market expectations move closer to the Fed’s outlook."

"We are seeing greater divergence between EM equities and EM FX. While MSCI EM is making new cycle highs and currently up 31% YTD, the corresponding MSCI EM FX index has been lagging this month. The correlation between the two is currently around 0.54, down from the high near .85 back in May and a high above 0.90 back in July 2016. "

"As the global backdrop hopefully clears up in the coming months, we still believe it is very important for investors to continue focusing on country fundamentals and on hedging out currency risk whenever feasible."

Author

Eren Sengezer

FXStreet

As an economist at heart, Eren Sengezer specializes in the assessment of the short-term and long-term impacts of macroeconomic data, central bank policies and political developments on financial assets.

GBP/USD bounces off lows, back above 1.3200

After bottoming out near 1.3160, GBP/USD manages to regain a bit of shine and reclaim the 1.3200 mark and beyond at the end of the week. Stronger-than-expected UK Retail Sales data seem to be helping the British Pound limit its losses, while the chaotic UK political environment keeps the bulls at bay for now.

EUR/USD looks consolidative around 1.1460

EUR/USD stages a modest rebound after slipping to a three-month low below 1.1420 at the end of the week. That said, the pair now looks to consolidate humble gains just above 1.1460 despite growing uncertainty surrounding the next round of US-Iran negotiations, which keeps the US Dollar’s downside contained.

Gold remains vulnerable, targets $4,100

Gold retreats for the fourth consecutive day on Monday, targeting the key $4,100 mark per troy ounce. The precious metal continues to face headwinds from the Fed's hawkish stance and renewed uncertainty surrounding the US-Iran negotiations.

Breaking: Iran closes the Strait of Hormuz amid ceasefire deal violation

Iran says it is closing the Strait of Hormuz after accusing the United States (US) and Israel of violating the ceasefire. According to Iran, the decision came over the continued Israeli strikes in Lebanon. The Iranian Revolutionary Guard Corps Navy issued a warning to all vessels: "Do not approach the Strait of Hormuz; otherwise, your security will be jeopardized."

The Iran war didn't break the US economy, but what happens next?

Nearly four months after the start of the Iran war, the US economy remains remarkably resilient. While the conflict initially triggered a severe disruption to global energy markets and a sharp rise in Oil prices, recent diplomatic progress between Washington and Tehran has eased concerns about a prolonged supply shock.

Regime change: Inside Kevin Warsh's first move to make the Fed unreadable on purpose

The rate did not move. That was the least interesting thing about Kevin Warsh's first meeting in charge of the Fed. The FOMC held its benchmark at 3.50%-3.75% for the fourth straight meeting, exactly as priced, and then the new chair used his first press conference to dismantle the machinery the market has leaned on for a decade.