Following Dudley’s hawkish comments, the conviction for EUR/USD parity strengthens amid the ranks of BTMU:
Here is their view, courtesy of eFXnews:
Now it’s over the Fed and with the financial markets increasingly pricing in the probability of a rate hike in March, there is certainly a much greater chance that Yellen’s speech on Friday may well support that logic.
Why would Yellen at this stage attempt to reverse market pricing given the FOMC have signaled there will be three rate hikes this year even before we know for sure what fiscal stimulus will look like? The latest to shift the market was San Francisco Fed President Williams who stated that a rate increase was on the table for “serious consideration” at the March meeting. St.Louis Fed President Bullard also called for the immediate end to the reinvesting maturing securities on the balance sheet of the Federal Reserve. How has market pricing changed? It’s been pretty dramatic in fact. The March Fed Funds futures contract by our calculation is now indicating a market probability of 70% for a March hike. Three days ago the probability was just 23%.
With that now having changed, we see less reason to argue for a delay beyond this month. That will ensure the dollar continues to advance over the coming days and assuming Yellen does not wish to alter market pricing then through to the meeting itself and beyond if a hike takes place.
Our call of EUR/USD breaching parity remains in place with the 2-year swap spread in favor of US rates breaking to new highs consistent with EUR/USD breaking below the 1.0400 level.
Action from the Fed in March could have quite a dramatic shift in market expectations and the rates curve could undergo quite a notable shift higher as the prospects of four rate hikes at each press conference meeting becomes more plausible.
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