US Money Markets: Circumstances auger for terming out
At a Glance
The desk believes that current US money market conditions favor terming out as the Federal Reserve appears poised to hold rates steady through 2026, contrary to market expectations of rate hikes. Per the full note, the Fed’s bill-buying program has stabilized bank reserves around $3 trillion, and the effective federal funds rate has slightly dipped. This environment suggests that inflation is likely to undershoot the target in the coming years, allowing for a prolonged period of steady rates rather than hikes. Despite a market inclination towards anticipating hikes, the desk emphasizes that consumer behavior and economic indicators support a wait-and-see approach from the Fed, which should stabilize and potentially strengthen USD pairs in the upcoming months.
Key Takeaways
- 01The desk advocates for terming out in US money markets due to stable bank reserves and a dip in effective funds rate.
- 02Current conditions suggest the Fed will maintain rates through 2026, countering market expectations of imminent hikes.
- 03Weak wage growth and lower disposable income are expected to dampen inflation, supporting the desk's perspective.
- 04Consensus targets for EUR/USD indicate a broad recognition of USD strength, with the desk's views aligning near the upper range.
Full Analysis
What the desk is arguing
The desk posits that terming out in the current money market environment presents a favorable strategy, as indicated by the Fed's plans to maintain policy rates through 2026. The supporting evidence stems from the recent stabilization of bank reserves at approximately $3 trillion and a slight decrease in the effective federal funds rate, highlighting reduced market pressures. This perspective aligns with an overall assessment that inflation is trending downward, which seems supportive of the Fed's stance on rates.
Moreover, factors like weak wage growth and falling real household disposable income signal less immediate inflationary pressure, potentially dampening core inflation moving forward. Consequently, the desk anticipates an environment conducive to maintaining rates at neutral levels, providing further rationale for a terming out strategy amid prevailing market uncertainty.
Where it sits in our coverage
The current consensus targets for EUR/USD see it at 1.1700 (range: 1.1200–1.2000), while firms like citi and mufg project targets of 1.1300 and 1.1800, respectively, by December 2026. As the desk's call to term out would suggest elevated confidence in the USD's strength against these currencies, it aligns closely with the upper bounds of the consensus spread.
How other firms see it
Several firms are aligned with the desk's view, including hsbc and goldman, both suggesting targets around 1.1700 for EUR/USD by March 2026. Conversely, firms like citi project lower targets, which might reveal a divergence in views on market direction. Notably, the central bank actions, particularly the Fed's Dovish stance, are creating various perspectives across different market participants regarding potential rates and currency movements.
What the calendar says
With no significant calendar events upcoming in the next month, traders should keep a close eye on how the broader economic narrative evolves, especially with energy prices influencing inflation expectations and subsequently the Fed's policy trajectory.
Market Implications
Watch for EUR/USD as it approaches the consensus target of 1.1700 amidst the prevailing Fed narrative. Given the lack of scheduled events, focus on shifts in market sentiment influenced by broader economic data.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2027 |
|---|---|---|
Goldman Sachs | Bearish | 1.1200 |
UOB | Neutral | 1.1450 |
Citi | Bearish | 1.1000 |
From the original
Articles US Money Markets: Circumstances auger for terming out 14:19 Rates Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Repo has calmed as a consequence of the Fed's bill-buying programme, which in turn has helped stabilise bank reserves in the $3t
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