There's never any middle ground with trading central banks
The thing with trading central banks and monetary policy decisions is that there's never any middle ground. Either the market is waiting for a hike or a cut, if a CB is hawkish or dovish, or it's waiting for a CB to turn hawkish or dovish, if its in neutral mode.
Until the ADP today, this week has been one where the market has been accepting of a hike and unwilling to roam around but the ADP showed there is still some Fed trading waiting on the sidelines as the risk events pass.
So now a March hike is in the bag and wrapped up with a nice little bow, what can the market trade next? If the latest CME Fed Funds futures are to be believed, not only is March priced in but now the expectations for 4 hikes this year have crept up. Standing at 21% late yesterday they've moved up to 23% today (post-ADP).
That's not a big move by itself but if it's the start of another shift in expectations, that's going to have a big impact on the dollar. Last year was about broken Fed promises on how many hikes were coming, and the market was more cautious going into this year. Now we're facing two hikes in 3 months, that could be enough to send expectations racing ahead, and we know how that can get out of hand.
For trading, I think in the very short-term, next week's hike is potentially worth a fade but the big risk is if the Fed is super hawkish. On past evidence, it's hard to see that happening, considering how long we had to wait for the first hike, and then the second, and particularly how dovish Yellen remained throughout all that.
And, take a moment to think about that too. If Yellen suddenly turns into the biggest hawk going, and starts priming multiple hikes after March, will that signal that they are worried about something, and that that worry needs greater attention than the risk to the economy of hiking too fast?
But back to the possible ramping of hike expectations, if the market follows that path, it's likely (as normal) to take it to the extreme before realising its gone too far, and that in itself will be a great trading opportunity.
Let's go hiking with Yellen
