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Week Ahead, May 18

Short Description

Negative US interest rates?!

Video Script

Hi everyone, I’ve been getting a tonne of questions about whether interest rates could really go negative into the United States. That’s because Feds funds futures markets just implied they will - so I want to discuss what’s going on there – as well the two big things I have in mind for the week ahead in financial markets which are Federal Reserve Chair Powell’s testimony to Congress and the latest FOMC minutes. 
Before that let’s kick off with the economic calendar. We’ve got a Eurogroup meeting on Monday then an EcoFin meeting on Tuesday. A breakthrough on joint debt issuance would be huge for the Eurozone and would very likely change what the ECB decides in June. So-called Coronabonds still seems unlikely but the German court ruling might spur some action from politicians. One for the diary is when Powell testifies to Congress on Tuesday. We’ve got CPI data from the UK and Eurozone where the crash in oil prices in April could easily take the month-over-month change in consumer prices negative, which is what just happened in the US CPI. That’s followed by the FOMC minutes and we round off the week with first set of Eurozone PMIs for May.
Now before I discuss what negative rates could means for markets, can I ask that anyone preparing for the week ahead, watching this video, and working hard to be the best trader you can be- give yourselves a pat on the back and click the like button on this video! It has the added bonus of making make sure more people see this video, which means we can keep producing them. 
Alright what on earth are Fed funds futures? It’s actually super simple; they work like any futures contract where the price reflect where the market thinks the underlying price will be when the futures contract expires. Well instead of it being, for example, an oil futures expressing where oil prices might be when the contract expires, it’s the market opinion of where the federal funds rate – the interest rate set by the Fed - will be at the time of the contract expiry.
It’s pretty easy to price too–its 100 minus the expected fed funds rate at expiry. So say interest rates are expected to be 0.25% when the June contract expires- then the price of the June Fed funds futures will be somewhere close to 99.75.
But here’s the odd thing – the price of some 2021 Feds funds futures flipped to over 100 – that means traders are pricing negative interest rates in the United States in 2021. OK, who cares what these traders are thinking right? Well actually whenever we have a Federal Reserve meeting, traders and even the Fed themselves look at these contracts to judge market expectations. 
Fed Chair Jerome Powell said last week that there is no plan for negative interest rates so I expect him to say the same to lawmakers this week in his testimony. I’d also expect there to be sparse, if any mention of negative rates in the FOMC meeting minutes. But if there is, it could cause some movements in markets.
All else being equal, negative interest rates should be seen as a negative force on the dollar. However, for the Fed to go to negative rates the economic scenario would have to be pretty desperate and that could cause flows into the dollar as haven.
Right thanks everyone, good luck trading and make sure to subscribe so you don’t miss the next video.

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