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Central Bank Watch: Patience is Key

For digital assets, from a macro perspective, the focus remains on the softer economic activity data rather than a nudge-up in inflation.

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Following a week of conflicting US data - inflation that rose while retail sales declined, the Fed may decide to exercise more patience. But most investors do not possess the luxury of a cautious approach, and in FX, well-liked short-dollar positions have been rapidly revised.

This indicates that further USD resilience in the near term might not result in significant USD rallies either. For digital assets, from a macro perspective, the focus remains on the softer economic activity data rather than a nudge-up in inflation.

Dollar Bears Hit Back

Significant portions of the dollar rally sparked by more recent inflation data have been reversed due to lacklustre activity figures.

In January, retail sales in the United States declined more than anticipated; the control group, which excludes volatile commodities, contracted 0.4% month-over-month as opposed to the anticipated 0.2% increase.

This is cause for concern: as purchasing power is dampened by decreased credit availability and persistent inflation, spending growth will take longer to recover.

Additionally, another initial unemployment claims print fell short of expectations, further indicating that the labour market remains robust despite the continuing claims - those having difficulty re-entering the workforce - increased more than anticipated.

Ultimately, January industrial production lagged behind expectations, notwithstanding a modest uptick in the Philadelphia Fed and Empire Manufacturing indices.

In a nutshell, it is difficult not to conclude that the Federal Reserve is likely maintaining a cautious posture for the time being.

The market, the Fed, and the consensus agree that inflation will eventually decline significantly. However, the current state of the labour market and inflation figures increase the likelihood that this will occur later than originally anticipated.

Although there have been indications to the contrary from retail sales and other activity indicators, such as fourth-quarter GDP data, the overall activity picture will not significantly weaken for some time.

Consequently, the fourth quarter GDP data is expected to remain positive.

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Fed Watch: 30-Day Fed Funds Futures & Options

Uncertainty around the Fed's interest rate path led to record-high trading volumes in January.

After a year of exceptional risk management, rates markets began 2024 with continued high uncertainty, changing Fed predictions, and unprecedented hedging.

Interest Rate volumes in January reached a record high, with over 13 million contracts traded daily in futures and options.

Falling T-Bill Futures Yield Point to Interest Rates on Hold

The significance of T-Bill futures is underscored by decreasing yields.

The significant returns during the 13-week Treasury bill auctions have decreased by around ten basis points over the past four months, suggesting bets favouring short-term interest rates on hold.

Given the possibility of Fed interest rate cuts by June, traders now say - it is essential to hedge cash holdings. In January, T-Bill futures had their most successful month since they were introduced.

CME FedWatch

What is the probability of the Fed adjusting the Federal target rate at the forthcoming FOMC meetings, as perceived by interest rate traders?

This is a good indicator as Fed Fund futures represent the whole market's perception of the Federal Reserve's future monetary policy direction.

This examines the likelihood of fluctuations in the Fed rate and US monetary policy based on the information provided by the "30-Day Fed Funds futures" price data.

The latest findings show that the target rate probabilities for the March meeting have dramatically collapsed for bets on a rate cut.

That tells us that futures trading on interest rates on the Chicago Mercantile Exchange point to no change at the March Fed meeting.

Now, the bets have piled up to 91.5% for the fed funds rate to stay at 5.25%-5.50% range compared to a near 53% bet just a month ago.

There is still a one-in-three chance the Fed will cut rates from over 50% a month ago for May. The dramatic shift is clear, with 64.5% of bets now in favour of rates remaining unchanged. That compared to just 15.2% a month ago.

But traders' patience runs out beyond the May meeting.

Indeed, bets in favour of a rate cut by the Fed jumped to over 80% at the June meeting, with only about a fifth taking a position for rates to remain unchanged.

More importantly, bets are also clearly spreading out for rate cuts beyond 25 basis points.