USD could be vulnerable as Fed expectations top out - BNPP

Research Team at BNP Paribas, suggests that the pricing for a December Fed hike may be topping out, with a Q4 rate hike now 67% priced in.

Key Quotes

“Fed action is still clearly dependent on data and financial conditions and hence we do not expect the market to fully price in a hike this far ahead of the December meeting. This leaves us wary of positioning too aggressively for USD upside despite our bullish year-end targets. Speaking Wednesday, New York Fed President Dudley noted the US may not be at full employment yet and that slack remains in the labour market.

Similar sentiments were expressed in the minutes to the September meeting, even as some participants noted that it would be appropriate to raise the Fed funds target “relatively soon” if the labour market continued to improve and economic activity strengthened.

Overall, we view the message from the Fed as broadly consistent with our expectation for December tightening.

Ahead Thursday, focus will be on weekly initial jobless claims and a speech by Philadelphia Fed President Harker on the economy. Elsewhere, China trade numbers for September showed import and export growth both softer than expected.”