UBS Morning Adviser

FX option markets are signalling an action-packed week ahead. Figure 1 shows that attention is squarely focused on Janet Yellen’s testimony on Tuesday – the first in her capacity as Fed Chair. The soft payrolls report on Friday arguably raises the stakes. Although the consensus still expects a steady reduction in the monthly pace of QE3 asset as the year progresses, if anything investors now expect Yellen to place an even greater focus on the policy rate remaining lower for longer. That’s a key signal from the market reaction to Friday’s employment data, where Fed Funds futures have now completely priced out any prospect of a rate hike until Sept 2015 (Figure 2). Not surprisingly, Cable vols for Wednesday expiry are even higher when the Bank of England is due to announce an overhaul of its forward guidance framework, the first edition having been rendered obsolete by the faster-than-expected decline in the unemployment rate.