Fed and ECB: December Hike Priced In
Markets price December rate moves by the Fed (89%) and ECB (94%). US yields above 5 percent, EUR/USD at 1.1053.
Key Takeaways
- Markets treat a Fed hike in December as the base case: roughly 89 percent probability.
- An ECB rate move in December is also priced in at about 94 percent.
- EUR/USD stands at 1.1053, with daily and weekly momentum pointing down.
Anyone trading the dollar and the euro today hears the same message from every side: rates are going up. Only the pace is disputed. The US 10-year yield has reclaimed the 5 percent mark, and the question is whether the Fed sticks to a quarter point in December or adds a half point.
Bond Markets Have Already Made Up Their Mind
The bond market shows the sharpest move. Finanzmarktwelt calculates that since November 6, when the 10-year yield sat near 4.82 percent, it has climbed 31 basis points to 5.13 percent. Two-year US notes yield 4.855 percent, up from 4.46 percent a week ago. The average yield on global government bonds rose from about 3.77 to 3.91 percent over the same period.
Behind this lies a higher price tag on rates overall. Across eight economies, swap markets now price in more than 50 basis points of rate changes within a year, versus 33 in early November. According to Finanzmarktwelt, not even the Nvidia sell-off turned government bonds into a safe haven.
Three Fed Voices, One Message
The trigger was US inflation data from Tuesday that came in above expectations, along with an unusual cluster of clear statements. Fed Governor Christopher Waller considers 25 basis points likely in December and 50 possible if inflation proves stubborn. Dallas Fed President Lorie Logan argues for at least two more quarter-point hikes, as soon as possible.
Beth Hammack, president of the Cleveland Fed, described the situation on Thursday as follows, according to Finanzmarktwelt: core inflation rose more strongly than expected in October, and progress back toward 2 percent has stalled. She also blames the data-center building boom for added demand. Hammack already voted in October against holding the policy rate at 3.75 to 4 percent. In her view, larger steps would only be needed if the Fed falls behind the curve, and she does not see that. The Fed meets on December 9.
Why the Size of the Move Decides the Exchange Rate
Because both central banks count as hikers, neither side holds a clear rate advantage. The magnitude becomes what matters. Steven Barrow of Standard Bank sees a risk that central banks will have to do more than is currently priced in, unless equities fall sharply or oil drops back to pre-war levels.
Views on yields differ. Schroders fund manager Kellie Wood expects yields to keep rising through year-end. K2 Asset Management buys at around 5.3 percent, while Brandywine Global names 5.5 percent as the next target. US producer prices follow today at 2:30 p.m. German time.
What momentum says
Momentum signals a mixed picture for EUR/USD. On the hourly chart the state is neutral; on the 4-hour, daily and weekly charts it is bearish. At the time of the snapshot on November 13 at 12:37 UTC, the price was 1.1053 US dollars. The daily reading carries a score of -0.27.
Scenarios
If US producer prices come in higher than expected, yields could run toward 5.5 percent according to Chen, and the debate over 50 rather than 25 basis points would gain fresh fuel. If the data disappoint, the 5 percent mark on the 10-year yield would be the gauge for whether the sell-off pauses. Evidence of a euro reaction to this data is still pending.