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Despite 13 central banks meeting this week and most expected to hike rates aggressively, it’s the FOMC meeting that is the marquee event of the week. With so many variables that could move markets, we look at the core factors that traders should be aware of when assessing risk around the FOMC meeting.
Rates Review – we display the implied rate hike priced by the market for the upcoming central bank meeting, and the step up (in basis points) to the following meeting(s).
Balance of risk – With the market pricing a 20% chance of 100bp hike and the ‘dots’ likely to modestly undershoot market pricing, it feels there could be a downside bias in the USD into and around the meeting. Any selling in the USD will provide relief to equities, but I suspect this offers levels for the shorts to re-enter. The market will watch the ‘terminal’ rate in fed funds pricing (currently 4.4%) and risky assets should be sensitive to moves in this pricing. US 2yr Treasuries will be closely watched and a move in the yield above 3.9% would be positive for the USD. Conversely, any move below 3.80% would weigh on the USD and boost risky assets.
Positioning – CFTC data shows traders clearly long of USDs, and broad positioning is the most stretched since July 2020. Clients are sensing a turn and are largely positioned short USD, notably vs the GBP and JPY. We see traders net short NAS100 and positioned for a near-term bounce in gold.
Volatility – Unsurprisingly 1-week FX volatility has risen, notably GBPUSD which is close to the 100th percentile of the 12-month range. We can see the expected move (up or down) over the week and the implied range (with a 68% level of confidence). The market is expecting greater movement, so consider this in position sizing.
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