So just how much of a US rate hike is already factored in?

Author: Mike Paterson | Category: Education

Some thoughts on today's US interest rate decision 14 Dec

Judging by the voice of the masses a rate hike of 0.25% is a shoe-in later from the FOMC.

Not just for the sake of being a contrarian but I still remain unconvinced that it's such a certainty or indeed a good idea given all the global fragility right now. On the other hand with markets expecting a hike it might be considered unsafe to disappoint them.

There are certainly some US economic arguments to justify a hike but 38 years in the fickle world of FX has taught me always to expect the unexpected.

So even if  I'm being daft/too cautious/just plain wrong and the FOMC proceed as planned just how much of a hike is already factored in to currency markets? If 99.9% of the world's traders and robots have been/are expecting this doesn't that mean the upside for the US$ is limited?

In a nutshell, and imho, that's a big resounding given so for me the risk is to the downside. Yellen is unlikely to talk in hawkish tones even after a hike and her words will be deliberately aimed at assuaging the other nations around the world who do not have the luxury of such flexibility right now.

Yes Yellen might want to crow about her time at the helm but the times in which we live are fragile and fickle both economically and politically and that means caution is always to be advised.

So that all points to downside risk for the greenback and expectations generally but are we looking at a double-bluff here. Hike already factored in so some money already being taken off the table? Yes, probably.

So what about the algo boxes ? Surely they haven't factored in a hike? Quite possibly but will still react to the headlines even if it's not the core message of the rest of it. Just witness the moves on last week's ECB announcement prior to the presser. That was a rise and fall created by knee-jerking robots and not humans.

And therein lays the rub on tonight's price action. How much of the immediate aftermath will be a true reflection of real consequences. Well, regular readers will know my mantra on this by now, " Ours is not to reason why, ours is just to sell, and buy" and that's what I'll be looking to do. Sell USDJPY into a rally, and buy EURUSD in a dip given the option based interest into 1.0500 that I've been highlighting lately.

Certainly not ready to go long of GBPUSD yet in any circumstances so once again I'll be looking to play EURGBP from my favoured long side from the dips.

Check out my order board posts for levels to add to any t/a you're throwing into the mix.

Bond, equity and commodity markets will all have their say but I'm not going to second-guess on all that and I strongly suggest you don't either.

FX trading for me, after 38 years in the business, is still a simple process complicated by others. I'll cast my eye across other markets but will have my key focus on the currency price action playing out in front of me. If you're trading core pairs make sure you keep a close eye too on cross-related action.

I said that FX trading should be a simple process, which it should be. That doesn't mean it's an easy process which is why I prefer to deal on fact rather than a coin-toss.

Let's see what transpires later, and remember, we can only control those things over which we have control. Ourselves and how we respond.

Good luck and good trading everyone.