FX Currency Markets : Leading Indicators Forecast Turbulence Ahead if Fed Rate Hike Comes Early

Modified: Wednesday, 23 March 2016 16:52 BST - Written by Minesh Chaudhari

STORY LINK FX Currency Markets : Leading Indicators Forecast Turbulence Ahead if Fed Rate Hike Comes Early

Circumstances for commodity currencies such as the Australian Dollar, New Zealand Dollar and Canadian Dollar may become a lot more difficult in the near future. This is due to three Fed officials recently making hawkish statements in favour of an early interest rate hike, potentially as soon as April.

Futures Markets Only Give 25.7% Chance that US Interest Rates will Hold at 0.50% by Year-End

FX insiders regularly make use of key indicators to give them a read on the likely direction of the currency they are tracking. Our leading analyst takes a closer look at the what these ‘tells’ are coming up with currently below –

$VIX measures the number of defensive ‘put’ orders – akin to insurance policies protecting against a price move lower - placed by Chicago’s equities traders on the purchases they strike. $VIX is considered a gauge of fear levels amongst investors, so elevated levels indicate a ‘risk-off’ trading environment, while low levels point to a high appetite for risk. $VIX slumped to $14.22 yesterday – its lowest level since the start of November 2015 – suggesting that FX market participants are in go-ahead mood.

Such a trading environment has a tendency to favour the risk-driven Commodity Dollars, so analysts currently forecast good gains for the Australian Dollar (currency : AUD) and New Zealand Dollar (currency : NZD) against the Pound Sterling (currency : GBP).

Futures markets exist for many significant risk events and perhaps the most important future move as far as FX insiders are concerned is the timing of the next interest rate increase from the US Federal Reserve. At the time of writing, futures markets are pointing to only a 25.7% chance that the headline US interest rate will remain at its current level of 0.50% at the end of the year.

GBP USD Exchange Rate Forecast to Fall Back into 1.3000s

Meanwhile, there is an implied percentage chance of almost 33% that the cost of borrowing Stateside will stand at or above 1.0% on New Year’s Eve, 2016.


This indicator hints that there may be concerted support to come for the US Dollar (currency : USD), with the majority of analysts predicting that the Sterling US Dollar exchange rate will fall back into the 1.3000s GBP USD sooner rather than later. If another near-term US interest rate hike does materialise, then expect the Commodity Dollars, (AUD, NZD, CAD), to give up ground against the Pound.

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TAGS: American Dollar Forecasts Australian Dollar Forecasts Canadian Dolla Forecasts