EUR/USD and Fed Funds: Levels, Ranges, Targets

Current Fed Funds average for 3 months in 2017 is 0.70. The 1 year average to March 2016 is 0.47 and Median 0.40. Fed Funds 2 year average is 0.32 and Median 0.36. On a 2 year Forward basis, Fed Funds prices at 2.16. Soc Gen prices 5 year Forward Fed Funds from Swap rates at 2.33. The difference is personally to never use market rates because market rates are always off kilter.
Is the question to Fed Funds not where is the terminal rate to end the rate hike cycle but is 2.16 or even 2.33 to ambitious a forecast. Fed Funds from monthly averages 1 to 10 years remains in severely overbought territory. Then what if the Fed raises ever so slowly over time. Current EUR/USD at about a 1 year Forward basis from present prices forecast an exorbitant implied average price at 1.25. On a Fed raise basis then an implied EUR/USD goes to 1.02 easily. On a mid point, a 1.13 EUR/USD appears so far to factor as a longer term top.
EUR/USD. Vital break points at day 2 remains now at rising 1.0618, stuck 1.0670 and falling 1.0722. EUR/USD is in showdown mode as 1.0722 must break to travel higher or 1.0618 to head lower.
The bottom side at 1.0618 for today is protected and won’t break therefore buy the drop is the way today. Likewise, 1.0722 forecasts a target slightly above 1.0722. Its very possible to see a slight break higher but then EUR/USD travels directly back inside the 1.0722 to 1.0670 range. A break of 1.0670 then range becomes 1.0670 to 1.0618. Either way, the range overall is 52 pips.

 

Brian Twomey

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