NEW YORK (Reuters) - U.S. interest rates futures fell on Tuesday, retreating further from contract highs, but they still indicated traders have not ruled out the possibility of a Federal Reserve interest rate cut by the end of the year.
Traders scaled back holdings in federal funds and Eurodollar contracts in response to a rebound in global equities that shed more than $2 trillion in market value following Britain's vote to leave the European Union, known as "Brexit."
The stunning outcome has roiled financial markets and sparked debate whether the U.S. central bank could raise interest rates at all in 2016 due to Brexit possibly hurting an already sluggish global economy.
"Is Brexit a regional shock or a global shock?" said Paresh Upadhyaya, director of currency strategy and portfolio manager at Pioneer Investments in Boston. "In this current environment, which is precarious, how could the Fed tighten policy?"
Most U.S. interest rates futures posted contract highs on Friday when it became apparent that the "Leave" camp won Thursday's referendum.
Rates futures initially fell when early exit polls had pointed to a "Remain" victory.
The surge in rates futures implied traders began anticipating Fed action to counter negative effects from Britain's untangling from EU rules and regulations, which may take years to complete.
On Tuesday, federal funds futures <FFN6> implied traders saw a 4 percent chance the Fed would lower interest rates at its July 26-27 policy meeting, down from 7 percent on Monday, according to Reuters data. <FEDWATCH>
Prior to the Brexit vote, July fed funds had suggested traders had expected about a 15 percent chance of a rate hike.
Fed funds futures implied traders did not price in the probability of a rate increase until December.
December fed funds <FFZ6> implied traders placed a 8 percent chance of a rate cut and a 17 percent chance of a rate hike at the Fed's last policy meeting of 2016, CME Group's FedWatch program showed.
A week ago, Dec fed funds had suggested traders had priced in about a 50 percent chance of a rate hike at year-end.
(Reporting by Richard Leong; Editing by Cynthia Osterman)