How To Trade With Rate Hikes On The Horizon?

Surveys Confirm That Analysts Are Expecting 3 Rate Hikes in 2017…..

(Click on image to enlarge)

The time is nigh for rate hikes. On Tuesday, 13 March and Wednesday, 14 March, the Fed FOMC will be meeting to plot out the course of monetary policy vis-à-vis the Federal Funds Rate. The CME Group FedWatch tool now indicates an 86.4% probability of interest rates rising by 25-basis points on Wednesday, 15 March. This is up from 84.1% on Monday, 6 March 2017. With a rate hike all but assured, the more pertinent question is how this will affect binary options trading activity. For starters, we can limit our focus to 3 key areas: the USD, commodities, and Wall Street equities.

(Click on image to enlarge)

The most important thing to remember about interest rate hikes (increases to the Federal Funds Rate) is that most of the expected increase has already been priced into markets. Simply put, this means that the effect of the actual announcement will be muted. Nonetheless, the only thing that concerns binary options traders is directional movement, not the size of that movement. Given this reality, an increase of 25-basis points to 0.75% – 1.00% will move the needle for the USD in a bullish fashion. Presently, the US dollar index is up 0.05%, or 0.05 points at 101.76. It is hovering around its 52-week high. This is the clearest such indicator that the USD is running rampant. Dollar-denominated commodities such as gold bullion react negatively to rate hikes since they become relatively more expensive. Demand decreases as prices drop and put options are the order of the day.

Traders urge to Follow the broader trend and go long on the greenback

For binary options traders, it is less important to follow individual currency pairs (major pairs, minor pairs, and exotic pairs) than it is to gauge the overall performance of the US dollar by way of the DXY. Heading into next week, we will see tremendous momentum for the greenback, and this necessitates the placement of call options on the currency. Of course, there are many peripheral financial instruments that will be affected by a rate increase. Contrary to expectation, Wall Street will rally once the announcement is made. This may seem counterintuitive, given that high interest rates decrease the profitability of listed companies.

(Click on image to enlarge)

However, the fact that the Fed feels confident enough to raise interest rates is a sign of the robustness of the US economy. This will cause a tremendous uptick in capital movements to US stocks. Let’s consider the statements made by Stanley Fischer and Janet Yellen – they both expect modest but sustained increases to the Federal Funds Rate. These keywords are important. Provided there is no shock increase in interest rates, binary options traders can expect a gradual strengthening in Wall Street equities. The Dow Jones Industrial Average is currently trading near record highs, a smidgen beneath the 21,000 level. As we approach Wednesday next week, we can expect this robustness to continue.

What Signs are there that the US Economy is on Track for Rate Hikes?

(Click on image to enlarge)

First of all, the stock market is at record highs. This is unprecedented in the history of the US, and the levels are truly mind-boggling. Consider the following levels on Wall Street:

• Dow Jones – 20,954.34 up 22.73% 1 year
• S&P 500 – 2,375.31 up 18.66% for 1 year
• Nasdaq Composite Index – 5,849.18 up 24.23% for 1 year

Overall, analysts are expecting a 25-basis point increase next week, if not by June 2017. The net effect of a Federal Funds Rate (FFR) increase is an expected increase to 1.375% within the next 9 months. By December 2018, the expected FFR is going to 2.125%. The path is clear for call options on the greenback, and equities markets. For commodities, the brakes are on and put options are the best bet.