Week Ahead in FX – Hawkish Fedspeak Boosts USD Ahead of NFP

Several Fed Members Have Hinted a Rate Hike Could Happen in April FOMC Meeting

U.S. Saint Louis Federal Reserve President James Bullard issued strong statements about the central bank’s rate decision in March and has put the Federal Open Market Committee (FOMC) meeting in April as “live” The comments from the voting member of the FOMC gave the USD a boost across the board after central bank action and the Brussels attacks had created volatile trading conditions.

The Fed has been under fire for holding rates unchanged at 0.50 percent in March after the much anticipated December rate hike. U.S. fundamentals haven’t changed drastically, yet the Fed has decided to exercise more patience. Central banks around the globe are facing credibility issues as the European Central Bank (ECB) and the Bank of Japan (BOJ) have announced additions to their stimulus programs that have failed to moved the needle. Bullard’s comments have addressed the U.S. central bank logic behind the decision to keep rates on hold, and has hinted at a rise in rates soon.

The ADP private payrolls report will act as an opening act on Wednesday with a forecast of 200,000 new jobs. The ADP private payroll report will be published on Wednesday, March, 30 at 8:30 am EDT. ADP and NFP reports have shared a strong correlation of late, but for the most part on the headline jobs which could provide little insight into what type of wage growth results the NFP might bring. Employment has been the strongest pillar the Fed has used to support the U.S. economic recovery. Private and government reports will be available during the week that could validate the Fed’s argument with strong numbers, but have the ability to derail a rate hike if the wage growth numbers remain low. The U.S. non farm payrolls (NFP) will be released on Friday, April 1 at 8:30 am EDT.

The EUR lost 1.22 percent versus the USD in the past week. The single currency has been on the back foot against the dollar for the past 5 trading days as risk aversion and hawkish statements from Fed members have reignited the possibility of an April rate hike. The EUR/USD traded at a weekly high of 1.1337 earlier in the week and is now trading near weekly lows at 1.1178. The USD recovered against commodity currencies as the supply of crude continues to grow. USD/CAD was higher by 1.93 percent at 1.3248, AUD/USD saw a 1.59 percent retreat and NZD/USD was the biggest loser with 2.27 percent. The Pound took a big hit this week as Brexit fears have escalated following the Brussels attacks pushing the currency to a 2.18 percent loss versus the USD.

Fedspeak stronger than Fedfact?

Last week’s Federal Reserve policy statement appeared to pour cold water on any imminent rate hikes, but recent hawkish statements by Federal Reserve officials have surprised the markets and strengthened the US dollar. On Monday, John Williams, president of the San Francisco Fed, said that the Fed could raise rates in April and June, if economic conditions improve. Although the dot plot (an FOMC projection of rate hikes) was lowered at the March meeting, he insisted that the Fed had not changed its path of rate hikes. His comments were echoed by Atlanta Fed Dennis Lockhart, who also said that an April rate move was a clear possibility. Lockhart noted that the US economy was holding up well, despite weak global conditions. Lockart said that the economy was close to full employment and the Fed’s target of 2 percent inflation was attainable.

There was further support for rate hikes from two other Fed presidents, Patrick Harker and James Bullard. Harker said that given the strong economy, the Fed should consider raising interest rates as early as the April meeting, and added that he favored at least three rate hikes during the year. On Wednesday, Bullard said that with the US unemployment rate at very low levels, the Fed could be forced to raise rates sooner rather than later. Given this flurry of statements, traders should treat an April move by the Fed as a reasonable possibility, with US employment and inflation numbers having a huge say on the Fed’s decision.

US Near Full Employment But Questions Remain on Quality

The March U.S. non farm payrolls (NFP) report exceeded expectations with a gain of 242,000 new jobs instead of the forecasted 195,000. The positive headline growth was cancelled by a loss of wage growth with average hourly earnings dropping 0.1 percent from the prior month, the fact that the U.S. unemployment rate fell to 4.9 percent (a 9 year low) helped the USD ahead of the March FOMC meeting. The March NFP report was a mirror image of the February employment data release which missed headline forecasts of new jobs but surprised with strong wage growth. Given the mixed messages the Fed is sending via its economic projections and statements taken along with Fed member comments the fate of the USD this week depends on how solid the jobs report is. The U.S. is anticipated to have added around 195,000 to 230,000 new jobs keeping the unemployment rate unchanged at 4.9 percent.

A mixed NFP report is better than a negative one, but right now the market and the Fed are more focused on inflation than the headline employment number. The number of jobs has been growing but there are questions about the quality in wages of new jobs. Wage growth is needed if consumers are expected to power the recovery as the global economy continues to slow down.

FX Market events to watch this week:

Tuesday, March 29
10:00 am USD CB Consumer Confidence
Wednesday, March 30
8:15 am USD ADP Non-Farm Employment Change
10:30 am USD Crude Oil Inventories
Thursday, March 31
4:30 am GBP Current Account
8:30 am CAD GDP m/m
8:30 am USD Unemployment Claims
9:00 pm CNY Manufacturing PMI
9:45 pm CNY Caixin Manufacturing PMI
Friday, Apr 1
4:30 am GBP Manufacturing PMI
8:30 am USD Average Hourly Earnings m/m
8:30 am USD Non-Farm Employment Change
8:30 am USD Unemployment Rate
10:00 am USD ISM Manufacturing PMI

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

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 has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. 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