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11 hours to go, rate hike probability swings to ‘Yes’

Two days ago I found an interesting tool that looks at probability of a rate hike from the Federal Reserve – the CME FedWatch tool.

According to it’s data two days ago, there was 0% chance of a rate hike this month and 1.4% probability of a rate cut. Today with 11 hours and slightly over 20 minutes to go, market ‘sentiment’ or ‘rate hike probability’ has reversed to 0% chance of a cut and a 1.4% probability of a rate hike.

11 hours, 26 minutes to go

CME FedWatch tool September 2017 FOMC probabilities (11 hours before meeting)

CME FedWatch tool September 2017 FOMC probabilities (11 hours before meeting)

 

Questions for your trading psychology

What does this mean to a trader? Some food for thought:

  1. Would you go all in if probability of a rate hike stayed at zero based on a snapshot like the one above?
  2. Would you go all in if there was 10 years of data ‘proving’ that these probabilities are highly reliable?
  3. Would your trading strategy be any different if probability of a rate hike changed from 0 to 1.4%?
  4. Would your trading strategy change if the probability changed from 1.4 to 14%?
  5. If you already have a trade bias, how much must the probability change to make you change your mind?
  6. Would you agree that probabilities have little meaning to a trader because his trading outcome remains Win/Lose?
  7. What changed in 43 hours to shift the probability of a rate hike from 0% to 1.4%? Is it meaningful?
  8. If it has no outcome on your trading decision, do you still want to look at it?

(Look at it this way – when I place a trade, I have a long or short and a stop loss so I either win money or lose my bet. Just because rate hike probabilities move from 0% to 1.4% does not mean that I only lose 1.4% of my bet if I got the direction wrong.)

The CME FedWatch Tool analyses probability of FOMC rate moves using 3-day Fed Fund Futures. The Fed Funds are overnight borrowings. There is a video that claims that Central Banks like the Federal Reserve follow the market and not the opposite as we believe. Wat do you think?

 

43 hours ago

CME FedWatch tool September 2017 FOMC probabilities (2 days and 6 hours before)

CME FedWatch tool September 2017 FOMC probabilities (2 days and 6 hours before)

Director, TerraSeeds Market Technician Pte Ltd. Trader, investor. @sohtionghum was picked ‘Top 70 Forex Twitter in 2015’. Operates multiple strategies.

“Dear reader, I do not have a financial license to give advice. I do not know you the reader. Your financial objective and risk tolerance may be different from mine. I am not responsible for any consequence of your action.

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