Sunday April 3, 2016 - 15:12:41 GMT
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How Fed Funds Futures To Predict EURUSD Sentiment
by John M. Bland MBA, CTA
Given the strong influence of central bank policy decisions on the durection of forex values this year, I have been searching for a concurrent simple barometer of market policy sentiment. Fed Funds futures can serve this purpose. They are actively traded and instantly adjust to changes in trader sentiment. They are also unbiased because they tell you where the "smart money" is currently buting and selling.
The chart below shows Fed Funds Futures expectations as an indicator of Fed policy sentiment and the impact impact of changing Fed policy expectations on the value of the EURUSD. The left side scale shows odds of one Fed rate hike by end of 2016. This scale has been reversed to illustrate how changes in the odds of a Fed rate hike (blue line) are impacting with value of EURUSD (red line). As the odds of a rate hike rise the EURUSD tends to fall, and vice-versa. You can see last week how Yellen's speech reduced the odds for a Fed rate hike this year (blue line and how that strengthened the EURUSD (weaker USD in RED). Data from the U.S. on Friday were unexpectedly positive and raised the odds of a rate hike. The EURUSD is still deciding how to react. This is how what the Fed impacts your trading decisions, because market sentiment can determine the direction of trade.
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