Near 100% Certainty of a Fed Rate Hike

While the global economy digests Jim Comey’s testimony before the Senate intelligence committee, another economic milestone is rapidly approaching: A 25-basis point rate hike. The Fed FOMC is convening on Tuesday/Wednesday this week to decide upon further monetary tightening in the form of an increase to the federal funds rate. This will mark the fourth time since the global economic crisis that the Fed has hiked the FFR in a show of confidence about the state of the US economy.

Currently, there is a 99.6% probability of an interest rate hike, which will raise the FFR in the region of 1.00% – 1.25%. The economic ramifications of another rate hike will be modest, but notable. For one thing, credit markets will be subject to higher interest rate repayments, and bank stocks will benefit from increased rates. On Main Street, consumers with excess personal disposable income will receive more interest-related returns, but those with debt obligations will face additional pressures.

Major Economic Data Releases This Week

Several important economic data releases filtered through markets on Friday. Foremost among them were wholesale inventories. The April reading for wholesale inventories revealed a 0.5% decline, according to the US Commerce Department. Thomson Reuters analysts forecast a 0.2% gain in the April reading. Merchant wholesalers reported $462.3 billion worth of manufacturing sales, with wholesale inventory levels at $591 billion.

On July 11, wholesale inventories data for the month of May will be released. For this coming week, some important market moving indicators will be announced, notably the PPI – FD on Tuesday, the consumer price index data on Wednesday, followed by retail sales, FOMC meeting announcement and forecasts. On Thursday, jobless claims and industrial production will be released, and housing starts data will be announced on Friday.

Binary options traders will be carefully eyeing the markets for clues as to the direction of asset price movements.

Trading opportunity #1 – Bank of America (BAC) stock rising

As a trader, there is no clearer relationship than that between interest rates and bank profits. However, the theory does not often translate into a reality. We have seen multiple rate hikes recently, yet the stock prices of Bank of America, Wells Fargo & Company and other major financial corporations have failed to ignite. Recently however, Bank of America Corporation stock made significant headway, as the stock price rose approximately $1.42 reversing a short-term downtrend. Currently, the price of BAC stock rose 3.05% to close the week at $23.67 per share.

The 1-year target estimate price of the stock is $26.13 per share – a marked improvement on its current price. With the Fed slated to increase interest rates this week, the direction of price movement of the stock is encouraging. It is noteworthy that BAC has posted strong earnings figures over the past 4 financial quarters, defying projections at every juncture. Thomson Reuters analysts have given the stock a solid 2.1 buy rating on a scale of 1.0 (strong buy) to 5.0 (sell). While there have been some notable downgrades by Citigroup and Berenberg in April, the stock has taken a turn for the better and short-term call options appear to be a safe trade.

Trading opportunity #2 – FTSE 100 index gets a boost after UK elections

The ruling Conservative party finds itself in a spot of bother after it lost ground in the UK general election. Labour made strong gains under its firebrand leader Jeremy Corbyn, and Prime Minister Theresa May’s hand has been dramatically weakened after an election that many felt was unnecessary to begin with. As a result, the GBP weakened substantially towards the end of the week, helping to drive up gains on the FTSE 100 index. Analysts indicate that the GBP lost as much is 2.5% against the greenback, before recovering to $1.27 by the end of the day.

Prime Minister May is now requesting the Queen’s permission to form a new government, possibly with the Democratic Unionist Party. May currently does not have a majority to govern, and the United Kingdom is saddled with a hung parliament. Brexit negotiations will be taking place at the end of June, and the Prime Minister’s position has been weakened dramatically. For binary options traders, a weak GBP is a blessing in disguise. The FTSE 100 index moves in the opposite direction to the strength of the currency, and has risen as a result. The FTSE 100 is now closing the gap on the Stoxx 600, with strong gains post-election.

Trading opportunity #3 – GBP/USD pair on the back foot

Binary options traders have a keen understanding of the relationship between geopolitical uncertainty and the strength of the GBP/USD pair. When the trauma comes from the UK side, the GBP/USD pair falters. This is evident in the above graphic which represents the sharp slide of the sterling against the greenback. The sterling was trading close to the vaunted 1.30 level, before retreating after a disastrous outcome for the Prime Minister. It has since consolidated in a trading range between 1.27 and 1.28, but the trend is clearly negative.

For binary options currency traders, the next couple of days are going to prove telling as Prime Minister May attempts to cobble together a coalition.

The Prime Minister is under significant pressure to resign, both from within her party and the opposition. Fortunately, UK exporters have generated strong returns with a weak GBP, and this has helped the premier all-share index to make strong gains. The GBP/USD pair is likely to be weakened further by the Fed announcement on Wednesday of a 0.25% rate hike. For currency traders, it is safe to assume that the current short-term trend will persist. Put options are the sensible preference at this juncture.

Trading Opportunity #4 – Crude Oil Slips

The big question on traders’ minds is the following: Can oil prices sustain the $50 + per barrel benchmark? We have not seen oil prices at these levels since November 2016 when OPEC decided to cut production. Both West Texas Intermediate and Brent crude oil prices have been trading in the $40 – $50 range per barrel for quite some time. It’s US and Canadian oil production that is driving the price of crude oil lower on international markets. OPEC may be cutting production, but certainly not more than US oil producers are increasing it.

This leads to a net decline in crude oil prices. According to the EIA, the latest inventory report reflected an increase of 3.3 million barrels in the summer season. This helps to drive down prices. It is expected that crude oil production in the US will surpass 10 million barrels PD within a year, making this the greatest ever level of production in the United States. Another major negative for oil bulls comes in the form of Nigeria which is going to be increasing its oil supply by a quarter million barrels per day, since most of the oil refineries and production facilities have been off-line for a year. With so much oil flooding into markets, the safe option for short and medium-term prospects is put options.