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FX Week Ahead: Fed Rate Hikes, Dutch Elections, BoE and BoJ

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The markets are heading into a crucial week which promises a mix of politics and monetary policies. This week will be marked by central bank meetings from the U.S. Federal Reserve, the Swiss National Bank, the BoJ and Bank of England.

From these meetings, the FOMC is widely expected to hike interest rates by 25 basis points. On the political front, the Netherlands will be going to polls on March 15th. Here’s a quick recap of this week’s events that will influence the currency markets.

Third rate hike from the Fed expected this week

All roads lead to the U.S. Federal Reserve this Wednesday as the central bank is poised to push the rate hike lever once more. Short-term interest rates are expected to rise by another 25 basis point this March 15, following a strong payrolls data print last week.

CME Futures Fed Rate Hike Probability Tool (Source: CMEGroup)
CME Futures Fed Rate Hike Probability Tool (Source: CMEGroup)

U.S. short-term interest rates will move into the 0.75% – 1.00% bracket this week. The 30-day Fed Funds futures have also indicated this move jumping higher since early March, while the CME Futures’ Fed Funds Probability tool assigns a 93% odds of a rate hike this week.

The Fed Chair Janet Yellen made is quite clear in her public statement speaking at the Chicago event two weeks ago. She said that the central bank was likely to push rates higher at the next policy meeting, excluding any surprises.

“At our meeting later this month, the Committee will evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the federal funds rate would likely be appropriate.”

Ms. Yellen’s hawkish speech was also validated by other FOMC members who have also maintained the view for hiking interest rates this March.

The Federal Reserve is also maintaining the pace of rate hikes it projected in December. Overall for this year, the Fed is expected to hike rates three times, which means two more rate hikes after this week’s 25 basis point increase.

The Netherlands general elections

Kicking off the string of elections across Europe, the Netherlands one of the founding members of the European Union will be heading to polls on Wednesday. The Dutch elections are expected to be held manually meaning that official results will be counted manually and released a week later.

However, exit polls could already project the winner by late Wednesday/early Thursday morning.

For the moment, all eyes are on the two candidates, the incumbent Prime Minister, Mark Rutte, leader of the Conservative-Liberal VVD and Geert Wilders’ from the right-wing, anti-establishment Freedom Party (PVV).

No clear winner is set to emerge from the elections leading to the probability of another hung parliament that will lead to coalition politics. With most of the other political parties ruling out any coalition deals with the Freedom Party, the odds of a government under Wilders is unlikely.

Still, markets are not ruling out anything given the recent outcomes from the UK and the U.S. In the remote possibility of the VVD reaching the 40% or heading for a clear majority, it could send alarm signals all across Europe and could be potentially seen as strengthening other anti-establishment parties in the Europe, especially France’s Marine Le Pen.

Bank of England to remain on the sidelines

The Bank of England’s monetary policy meeting on Thursday is likely to pass off as a non-event with no changes expected from the central bank. This month’s meeting will see a new member join the MPC board.

Charlotte Hogg, the COO for the Bank of England will also be donning the role of the deputy governor. She will be replacing Minoche Shafiq. Speaking to UK lawmakers earlier, Ms. Hogg expressed her dovish views on monetary policy and indirectly hinted that interest rates are unlikely to be hiked for much longer than what the markets are pricing in currently.

Economic data last week showed that inflation expectations edged a little bit higher to 2.9% from 2.8% previously. Still, the BoE is likely to signal that it will tolerate an overshoot of inflation for some time.

The recent PMI figures which showed a slowdown could potentially weigh on the BoE which could spur policymakers to remain dovish.

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