You think December maybe in the cards or next year?
It looks like EUR/USD is sensitive to us rate hike.. and Mario Draghi will not do anything before that happens…
None of the markets care that much about the first Fed rate hike. They have had over a year to prepare for it. Also because the Fed said that when they do start to tighten it will be gradual. It is a form of dovish forward guidance. To get the market to expect gradual rate hikes in the form of one hike, then skip a few meeting, then perhaps another one. Instead of the previous historical cases when they hike rates every meeting, for a few meetings in a row. There is no reason for them to be more hawkish and tighten at every meeting, and the market knows that, so the markets don’t really care about the first rate hike.
Given the current situation, I think they will hike in December. They have reached a lot of their labor market goals (though still some slack left). They are not hitting their inflation goals due to the big drop in energy prices and the mixed wage pressures.
Things can change, such as what will Crude prices do. If they can stabilize, then a December hike is a higher probability, as Yellen did say that she believes rate hike to be appropriate this year. Now, if Crude prices start to plunge again, with some more China turbulence, and the mixed wage pressure continues, then the Fed can wait until 2016.
The EUR/USD has already priced in most of a December Fed rate hike. Any big drop to most likely come from the ECB expanding their QE program. They have been missing their inflation targets by a huge amount for the past two years since October 2013 and end of 2013 where I talked about the possibility of ECB QE. They still want to give their current QE program more time since they just started it in March, so it has only been active for 7 months now. They would rather give it another 3-6 months more. And also to see what the CPI numbers will be when the drop in Crude prices gets priced out.
What they haven’t seem to figured out yet is that they are assuming Crude prices stabilize. They may or may not. Even if they do, what is also going to get priced out of the inflation numbers is the drop in the EUR. So the drop in the Crude was disinflationary. The drop in the EUR was inflationary. When those two forces get priced out, the CPI is probably still going to be very, very low, necessitating more QE. That is my baseline scenario.
However, I am not dumb. The EUR/USD is not responding in a bearish way. The ECB downgraded the inflation and growth forecasts in the Sept meeting, but that was clearly not enough to entice the huge bearish macro order flow. The way it is setting up, is that there are some option barriers at 1.17 and above, especially at 1.20. So I would expect the EUR to rise a few % this year, setting up for a very big drop next year, as a stronger EUR is definitely not what the Eurozone needs. Of course, I still take it day by day and as Paul Tudor Jones said, I do not allow my trading to be influenced by some on the record comments I made yesterday. Best to approach each day aware of the scenarios that could cause a big rise or fall, and interpret information accordingly.