Week Ahead in FX: USD Falls After Fed Holds Gives No Rate Hike Hints

The U.S. dollar is lower against major pairs ahead of employment data.

The USD depreciated against major pairs after the Federal Open Market Committee (FOMC) decided to hold rates unchanged in April. The Fed’s patience combined with a shocking inaction from the Bank of Japan (BOJ) on Thursday as Japanese central bank also decided to wait until more data was available to measure the true impact of earlier quantitative easing measure. The result was a flight to safety away from the USD which benefitted most of the majors.

Investors sold the USD as the Fed continued its cautious stance. The June FOMC has only 11.3 percent of implied probability of a rate hike according to the CME Group FedWatch tool. July has 24.2 percent and September 36.1 percent based on 30 Day Fed Funds futures prices. Positive employment data in the first week of May will have little impact on the Fed’s decision in June unless it shows higher wages.

Employment remains the strongest pillar in the recovery of the American economy, but wage growth has been low; raising questions about the quality of the jobs available. Unemployment claims are at 43 year lows but consumers are not spending. The release of the U.S. non farm payrolls (NFP) on Friday, May 6 at 8:30 am EDT is expected to add more than 200,000 new jobs to the U.S. economy and keep the unemployment rate at 5.0 percent but the focus on the market and Fed officials will be on gauges of wage inflation.

 

The EUR/USD appreciated 1.98 percent in the last week. The pair broke through the 1.14 price level and is trading at 1.1454 after the Fed decide to leave rates unchanged in April and gave very little hints about a potential rate hike in June. The rate hike is still on the proverbial table, but not taking it off does not mean they will go for it.

The USD suffered setbacks against all major pairs (with the exception of the AUD) as the monetary policy divergence that provided the main boost for the dollar rally in 2015 has disappeared. The Fed is willing to show patience and will wait until the economy forces a rate move, rather than risk a proactive rate hike which could further erode their creditability.

 

The JPY had a big week as the Bank of Japan (BOJ) surprised the market, only this time Governor Haruhiko Kuroda did so by standing pat while another round of easing was expected. The USD depreciated 4.488 percent in the week to the JPY as the anticipated direction of the monetary policy from both central banks did not materialize. The lack of growth will continue to keep both set of rates close to current levels until there are further signs that their current strategy is working. The USD/JPY is trading at 106.69 after the pair traded at a weekly high of 111.89 ahead of the BOJ decision.

 

The AUD/USD depreciated 1.405 percent in a week of ups and downs for the Aussie ahead of the Reserve Bank of Australia (RBA) on Tuesday, May 3. The RBA is not expected to cut its benchmark interest rate but pressure has intensified as inflation touched a record low on Wednesday. The Aussie ended the week at 0.76 and will await the final decision from the central bank. Commodities have supported the AUD against the backdrop of lower rates as inflation slows down.

Central banks will be present during the week with he most notable contribution from the RBA with the release of its rate statement, annual budget release and monetary policy statement. Commodities and the slowdown of the Chinese economy have dictated the pace of the Aussie with no end in sight to that correlation.

Employment data in the U.S. will be key starting with the private payroll processor ADP and its non-farm employment report on Wednesday, May 4 at 8:15 am EDT. Thursday, May 5 will see the release of Unemployment claims at 8:30 am EDT. The NFP has been slightly downgraded as the biggest indicator in forex as the Fed has taken a more holistic view of employment and has reduced the emphasis on the headline NFP headline and unemployment rate to favour inflation gauges. The NFP will be published on Friday, May 6 at 8:30 am EDT.

Forex markets events to watch this week:

Monday, May 2
10:00am EUR ECB President Draghi Speaks
10:00am USD ISM Manufacturing PMI
12:30pm CHF SNB Chairman Jordan Speaks
9:45pm CNY Caixin Manufacturing PMI
Tuesday May 3
12:30am AUD Cash Rate
12:30am AUD RBA Rate Statement
4:30am GBP Manufacturing PMI
5:30am AUD Annual Budget Release
12:30pm CAD BOC Gov Poloz Speaks
6:45pm NZD Unemployment Rate
Wednesday May 4
4:30am GBP Construction PMI
8:15am USD ADP Non-Farm Employment Change
8:30am CAD Trade Balance
10:00am USD ISM Non-Manufacturing PMI
10:30am USD Crude Oil Inventories
Thursday May 5
4:30am GBP Services PMI
8:30am USD Unemployment Claims
9:30pm AUD RBA Monetary Policy Statement
Friday, May 6
8:30am CAD Employment Change
8:30am CAD Unemployment Rate
8:30am USD Average Hourly Earnings m/m
8:30am USD Non-Farm Employment Change
8:30am USD Unemployment Rate

 

*All times EDT