Week Ahead in FX: Fed’s Silver Tongues, Sunny Stephen, American GDP

There is no such thing as a quiet week in the forex market, but with few central banks making public statements, and with Monday being a holiday stateside and the only U.S.-based economic data due being a follow-up release, it appears there’s little that could make a major impact.

Though there’s no Federal Reserve meeting on tap, three of its members will do plenty of talking next week. Meanwhile, the Bank of Canada is expected to hold interest rates on Wednesday. The week will close with the release of the second estimate of first-quarter gross domestic product (GDP) in the United States.

Here is a list of important events to keep track of during the week:

Monday, May 25
• 11:00 a.m. USD FOMC member Stanley Fischer speaks
Tuesday, May 26
• 8:30 a.m. USD core durable goods orders
• 10:00 a.m. USD consumer confidence survey
• 8:10 p.m. USD FOMC member Jeffrey Lacker speaks
Wednesday, May 27
• 10:00 a.m. CAD Bank of Canada rate statement
Thursday, May 28
• 8:30 a.m. USD unemployment claims
• 2:20 p.m. USD FOMC member John Williams speaks
Friday, May 29
• 4:30 a.m. GBP second estimate GDP quarter-over-quarter
• 8:30 a.m. CAD GDP month-over-month and USD preliminary GDP quarter-over-quarter

Federal Reserve Members to Jawbone USD

The Federal Open Market Committee’s (FOMC) April meeting minutes showed the biggest highlight from the Federal Reserve policymakers’ pow-wow was an interest rate hike in June isn’t going to happen.
Regardless, the USD got a boost from Fed members’ comments that made clear they are pushing for a rate hike sooner rather than later. Market watchers had anticipated this given the soft economic data out of the U.S. in the first quarter of 2015. The central bank is adamant that the negative factors that have slowed down growth are transitory. The market is now expecting the earliest rate hike to come in the September FOMC meeting. Traders’ reasons for weighing June or September as the likeliest months for a rate hike is simple enough: those two meetings are followed by a press conference with Fed Chair Janet Yellen. It’s plausible Yellen would want to address the market and answer questions to avoid confusion.

Thanks to the FOMC statement, the greenback regained some ground versus the EUR after the single currency fell significantly on the back of comments from two European Central Bank (ECB) members. Benoît Coeuré and Christian Noyer, French members of the ECB’s executive board, recently revealed details about the bank’s €1.1 trillion quantitative easing (QE) program.

Coeuré said the ECB will front-load its debt purchases to avoid an excess of bond buying during the quiet summer trading days. Noyer, meanwhile, stated that the ECB could go beyond the QE amounts already announced in order to hit its inflation target. The two statements reassured markets of the commitment from the eurozone’s policymakers to stick with its stimulus program until Europe’s economy shows signs of sustainable growth. There were reports later in the week that implied the ECB did not publish the comments right after they were made, opting to wait until 7 a.m. British Summer Time. The central bank has pledged to be consistent and is chalking it up to an internal procedural error. The error was seen as the trigger to the EUR losing close to 1% versus the USD.

Strong U.S. inflation data on Friday lent some credibility to the Fed’s optimism and pushed the EUR/USD to 1.1020. Next week, three members of the FOMC will have the chance to keep the USD bid as they make their cases for an interest rate hike before the end of the year.
The speeches from these Fed officials will be evenly spread out during the week, and they will give the forex market plenty to chew on regarding the strength of the U.S. economy until the country’s gross domestic figures (GDP) are released on Friday.

Monday, May 25 11:00 a.m. USD FOMC member Stanley Fischer speaks
Tuesday, May 26 8:10 p.m. USD FOMC member Jeffrey Lacker speaks
Thursday, May 28 2:20 a.m. USD FOMC member John Williams speaks

Bank of Canada Expected to Hold Rates

The Bank of Canada (BoC) will be the sole representative of major central banks to make an official announcement next week.

BoC Governor Stephen Poloz, dubbed “Sunny Stephen” by The Economist, remains optimistic about the Canadian economy having an export-led recovery that will be boosted by a weaker loonie, as the Canadian $1 coin is known. Poloz addressed a business audience at Charlottetown, PEI on May 19. At that meeting, he stuck to his forecast for the economy that was released last April, and he is not expected to make any changes to the bank’s benchmark interest rate this week.

The USD/CAD broke through the $1.23 price level after an unexpected inflation boost gave the U.S. economy a lift. Wage increases in the American service sector have given the Federal Reserve hope that the economic malaise of the first quarter is truly a transitory event. Core inflation in Canada came in under expectations at 0.5% when 0.7% was forecast. Soft Canadian retail sales data kept the loonie low against the high-flying U.S. dollar.

To Poloz, a weaker loonie gives Canada a competitive advantage to boost exports, but the fact remains that the Canadian economy is failing to gain traction. The central bank will leave the benchmark untouched at 0.75% critics are increasingly calling for a rate cut, and it could come sooner than a hike since the Canadian economy has stalled.

For now, the loonie will continue to be under pressure. But with the Memorial Day holiday weekend in the U.S. ahead, and in a week with little American data due, it might get a reprieve after the BoC statement is released.

Central bank events to watch this week:
Wednesday, May 27 10:00 a.m.– CAD Bank of Canada rate statement
*All times EDT

US Unemployment to Show Resilience with Claims Release

The U.S. economy has been struggling to keep the same pace exhibited in 2014. First quarter growth has disappointed and depreciated the USD versus major pairs. The number of unemployment claims was higher in the last week at 274,000 but only slightly above the forecast of 271,000. The four-week average for claims is the lowest since the year 2000. Employment continues to be the strongest component of the American economy and has been resilient to the harsh first quarter.

The weekly release of unemployment claims and the Federal Reserve’s insistence on being data dependent will have traders eying the claims data that will be published on Thursday. Otherwise, there will be two releases of weekly data ahead of the biggest indicator in the forex market on Friday, June 5 when the nonfarm payrolls data will be released.

Thursday, May 28 8:30 a.m. – USD Unemployment Claims

US and Canadian GDP to Close out Week in FX

The downside of the data-dependent strategy by the U.S. Federal Reserve is that economic data tends to be hard to predict which creates volatility without the guiding hand of a central bank.
The Fed has decided that forward guidance is a thing of the past and is willing to take a step back, and let the market operate on an indicator release-by-release basis rather than the longer cycle of having policy members interpret the big picture. The U.S. economy has lost the momentum of 2014 as harsh winter conditions and lower oil prices took a toll in the first quarter of 2015. Employment continues to be the main driver of growth, but all other components continue to slow down.

Canada is dependent on the U.S., and although the former nation is riding a wave after the unexpected rise in oil prices, it might find a strong currency is detrimental to its export-driven recovery. The monthly gross domestic product (GDP) update is expected to be an improvement over last month’s flat reading. The higher granularity of the report month-to-month versus other quarterly reports gives the Canadian data more accuracy so that expectations are usually not far off the mark. Canada faces growth challenges as it lost the contributions from high oil revenues as crude was under pressure in 2014. It is too soon to say if the surge in prices in 2015 is sustainable as demand has not changed radically, and oil-producing nations continue to pump crude with wild abandon. The sooner Canada can make the transition back to manufacturing and services as the main drivers of growth, the stronger and more resilient its economy will be.
The U.S. preliminary GDP is the second estimate to be released on the first quarter of the year. The advance GDP was released on April 29 with a disappointing 0.2% on a forecast of 1.0% growth. The third and final figure will be released on June 24.

The Fed has stressed that the first quarter will show lower-than-expected growth given the transitory factors, but the central bank remains optimistic about the economy shaking off those effects by the second quarter. Data dependency will make this release a highlight given the short week, and as the forex market gets ready for the release of the nonfarm payrolls report the following Friday.

Friday, May 29 8:30 a.m. – CAD GDP month-over-month and USD preliminary GDP quarter-over-quarter

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza