The CME Group’s central bank observations tools BoEWatch and FedWatch show that market expectations indicate increasing probability of a Bank of England rate rise this December, while the Federal Reserve is expected to hike rates in September 2022 and December 2022.
The markets are increasingly anticipating a UK interest rate rise by the 16 December monetary policy committee meeting, according to data from CME Group’s BoE Watch Tool. Using MPC SONIA futures prices to gauge market expectations of the future course of BoE monetary policy, the tool is currently showing a 72.4% probability of a rate increase by the December meeting with a 27.7% probability of no change.
Commenting on the data, Erik Norland, senior economist at CME Group says, “SONIA futures markets currently price that the BoE will become the first of the major central banks to raise interest rates following the pandemic with a 21% probability that they move to tighten in November and a 72% chance that they will have moved to higher rates by December. These views probably depend on further strong data pointing to economic expansion, a tightening labour market and rising inflation.”
The CME Group Volatility Index (CVOL), derived from actively traded options on futures, shows that Sterling implied volatility has increased 25%, from 5.95% to 7.46% in the past month and sits near the top of the 6-month range, and ranks in the 29th percentile of the two-year range.
Meanwhile the recent release of September inflation data in the US, Fed meeting minutes and other factors have resulted in increased probability of a Fed rate hike as soon as the 21 September 2022 meeting, according to the CME FedWatch Tool.
Using 30-Day Fed Fund futures pricing data to gauge market expectations of the future course of Fed monetary policy, the tool is currently showing a 65% probability of a rate hike increase by September 2022 against 29% last month, and an 86% probability by December 2022 versus 66% last month.
At the same time, trading activity in Eurodollar options, which can also be an indicator of market expectations, are showing more focus on rate risk before December 2022.
Since the start of October, there has been a shift in trading volume with the shorter end of the curve, standard Eurodollar quarterly options and One Year Mid Curves, outperforming the longer end of the curve.
The CME Group Volatility Index (CVOL), derived from actively traded options on futures, shows that Eurodollar 1Year Mid Curve is at one-year highs in volatility at 54.6 bps.
©Markets Media Europe, 2021
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