FOMC and Payrolls to decide dollar destiny

Dollar points to close the week with gains against all of it major rivals, despite the restricted intraday ranges seen all over the week. As for the data front, the calendar has been pretty empty these last days, with news from Europe overall encouraging: PMI readings beat expectations, and bank lending figures up reverting latest negative trend. German IFO business climate index was the only negative number, decreasing for third month in a row in July.

In the US however, things were not that good with Core CPI printing 0.1% and a setback also in the Manufacturing PMI and New home sales, yet dollar edged higher anyway: much of its strength came for an improvement in weekly unemployment claims, with initial claims falling to their lowest level in eight years, supporting a bounce is US yields lately leading greenback’s moves. 

But next week comes full with promises of action, amid first line data hitting the wires: US GDP and FOMC meeting will take place on Wednesday, while US nonfarm Payrolls numbers will be released on Friday. That may exacerbate the market dullness over the first days of the week, as market will be waiting for such announcements to determinate whether this mild dollar strength will be sustained by fundamentals.

As for the FOMC, the fact is that not much should be expected, as there is no press conference scheduled post meeting. A statement will of course be released as usual, and market expects it to confirm QE will end following the October meeting, not a surprise anymore; attention will focus particularly in any line regarding the current assessment of the labor market, a barometer of when rates will be hiked. And while labor market indicators had been for the most mixed, the main indicator, Nonfarm Payrolls, will be release after the meeting, whichsignals the FED will likely maintain previous meetings wording. In that case dollar can suffer a setback, on diminishing expectations of a rate hike. If the wording changes however, and the FED eases its view on employment recovery anyway, dollar will likely get a boost.

When it comes to employment figures, unemployment rate stands at 6.1% Fed’s year-end target and an over 5 years’ low, while past month, the economy managed to add 288K new jobs. For this month market expectations are of 230K new jobs added which will fit average and therefore be understood as positive. The problem is still the participation rate, which measures the total number of people either employed or actively looking for work, a number the FED likes to ignore completely: the labor force participation rate for all ages stands at 62-8, the lowest since 1978. 

Nevertheless, if the numbers results above expected, investors will likely choose to price in a sooner than expected rate hike, more over if FED statement confirms purchase programs will end upcoming spring, with dollar edging higher across the board.

As for the rest of the world, there’s little to watch before Germany, with CPI and employment figures also schedule for next week. Any effect those may have in the EUR, will likely be over shallow by US critical figures.