In the US:

After a much-anticipated June rate hike evaporated in the aftermath of Brexit-induced global markets volatility, the futures markets varied wildly with respect to U.S. Federal Reserve expectations. On Dec. 14, based on the strength of employment and slowly rising inflation, the Fed followed through with its anticipated 25 bps hike. And after this, the futures markets are pricing in the potential for three additional 25 basis point hikes in 2017, assuming the current positive economic outlook continues for paced growth within the business cycle. Additional monetary policy response is dependent upon the impact to growth and inflation of the anticipated fiscal spending, tax and trade policies of the incoming Trump administration. The recent move higher in Treasury yields, particularly at the long end, suggests that markets expect some form of fiscal expansion.

In the UK:

Clearly 2016 was volatile. The June referendum decision to exit the EU devalued the pound and generated a Bank policy rate reduction of 25 basis points in August. Derivative markets have currently priced in no change to the current 25 basis point monetary policy rate for the December 15th Bank of England meeting. The forward curve reflects a policy neutral stance for 2017 with the policy rate remaining steady at 25 basis points. Though positive economic growth surprised in the third quarter after the prior quarter’s contraction, the outlook remains challenging as Brexit policy develops, offering the potential for further volatility in Sterling and the Official Bank Rate.

Looking back on 2016 and the uncertainty surrounding Brexit, Sterling rate markets have been central to the conversation. ICE Short Sterling futures began the year expecting tightening monetary policy – an outlook that was later proven incorrect when the BoE cut interest rates to fend off Brexit risks. The British Pound has remained weak since June, leading many to the conclusion that further easing may be challenging. Given the pending timing of Article 50 and a robust economy that is operating near full employment, some analysts are actually predicting that the BoE may have to tighten policy. Therefore, the outlook for 2017 appears to be volatile, with much to be determined.

In the EU:

EONIA derivatives markets are currently pricing in the current negative 35 basis point rate environment to remain steady for 2017. On December 8, the European Central Bank (ECB) announced that it would continue the 2016 monetary policy Quantitative Easing program; the central bank lengthened the program through the end of 2017 with a €20 billion reduction in monthly bond purchases beginning in April 2017. The current economic outlook of GDP and inflation is likely to remain steady with macro market political risk events – such as French and German elections, along with the timing of Article 50 related to Brexit - driving potential volatility.

This is viewed by many as a subtle pivot in strategy, which could become significant in 2017. With the political situation remaining a challenge, the French and German elections will represent key event risks for interest rate markets in 2017.