Global Rate Cut Cycle Looks Finished For Now - Central Bank Watch

TRADERS CAN'T ESCAPE US-CHINA TRADE WAR HEADLINES

As the calendar winds down, the news wire is heating up. Conflicting signals on the US-China trade war in recent days have injected a decent amount of volatility back into the financial market, leading to weakness across the board for the US Dollar at the start of December.

It is no longer the case that the US Dollar has shifting central bank rate pricing as a bullish catalyst. Other G10 currencies’ central banks have seen their interest rate cut odds pullback meaningfully at the same time. In light of this, pairs like EUR/USD, USD/CAD, and USD/JPY have seen meaningful shifts in positioning in recent days.

ECB RATE CUT CYCLE ON PAUSE AS LAGARDE REPOSITIONS

The European Central Bank is in a holding period. New ECB President Christine Lagarde is using the early months of her tenure to try and clear divisions among ECB Governing Council members. The schism exists as a result of former ECB President Mario Draghi ramming through his easing package at the September ECB meeting. As policymakers search for a new consensus, it seems likely that the ECB will remain on the sidelines through much of 2020.

EUROPEAN CENTRAL BANK INTEREST RATE EXPECTATIONS (DECEMBER 5, 2019) (TABLE 1)

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According to Eurozone overnight index swaps, traders are convinced that the period of a recalibration by new ECB President Lagarde will take several months: there is only a 17% chance of a rate move through March 2020. Accordingly, there are still no rates moves discounted through October 2020; now, there is a 44% chance of 10-bps rate cut in October 2020 as well as a 7% chance of a 10-bps rate hike.

IG CLIENT SENTIMENT INDEX: EUR/USD RATE FORECAST (DECEMBER 5, 2019) (CHART 1)

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EUR/USD: Retail trader data shows 44.4% of traders are net-long with the ratio of traders short to long at 1.25 to 1. The percentage of traders net-long is now its lowest since Nov 01 when EUR/USD traded near 1.11648. The number of traders net-long is 7.3% lower than yesterday and 31.2% lower from last week, while the number of traders net-short is 15.8% higher than yesterday and 31.6% higher from last week.

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