What is priced in for the Fed to start the week? | Forexlive

As of time of writing, the CME Fedwatch Tool is showing roughly 64% odds of the Fed raising rates by 25 bps this week. The other roughly 36% is siding with a pause in the tightening cycle. That shows how torn markets are feeling about what the Fed may do and is a major shakeup to pricing at the start of the month – when we were all still debating between 25 bps and 50 bps.

The fear in markets right now is that any inclination by the Fed to raise rates will put further strain on banks and more so, on sentiment among regional banks especially.

Meanwhile, a pause will invite more questions about their resolve to battle against inflation . And that would also call into question whether or not we have reached a peak in terms of rates. In that sense, even if the Fed resumes hiking rates, markets already have that predisposition to react negatively in fear of a banking crisis.

As for the outside risk of a 25 bps rate cut, that’s a bit far-fetched in my view but if it does really happen for whatever reason, I reckon that will incur extreme panic and fear in markets. I mean, if the Fed sees fit to turn so drastically, something must be terribly wrong. So, I would rule this option out just purely based on the optics.

For now, headlines are everything and we’ll see what other twists and turns will take place in the days ahead. But if there are no bad news and market sentiment is able to hold up, expect the odds to slowly firm up towards a 25 bps rate hike.