Improved fundamental factors drive sooner Fed’s rate hike

The recent unemployment data added to estimations for an upcoming U.S. rate hike after Federal Reserve Chair Yellen gave hints on last week that the central bank is likely to raise rates at some point this year. A total of 280K nonfarm jobs were added in May, and average hourly wages increased more than anticipated. Yields on short- and long-dated Treasury securities rose substantially.

The genuine reasons for increased expectation of Federal Reserve's rate hike from last fortnight or so are - firstly Greek lawmakers have voted in favor of creditors' demand and agreed the bailout package, Fed's chair Yellen hints on more likely outcome of Fed's decision of rate hike within this year and now improved unemployment claims.

On the other hand, the global macros are getting stronger, market sentiment improved after a majority of Greek lawmakers voted in favor of a second set of reforms late Wednesday, signaling that negotiations on an €86 billion European Union bailout can begin. The country is aiming for a deal by the middle of next month. The new measures include changes to Greek banking and an overhaul of the judiciary system. Greece had passed an initial set of austerity measures imposed by its creditors last week. These were a mix of economic reforms and budget cuts demanded before bailout talks could continue.

We think in between all these macro level developments volatility FX option markets is getting fueled up as the long lasting Greece matters came into a temporary resolution finally, now since the focus shifted onto Fed. The probability that the Fed will increase rates in September has increased to a median 63.5 percent from 55% in the poll conducted in early May.