Week Ahead in FX: USD Rebounds Ahead of FOMC

The US Dollar Recovers Awaiting the FOMC Statement

The Sunday news that the Doha oil output freeze meeting had failed hit markets with the Asian open. Commodity currencies were hit as another news item was gaining traction in the energy sector. Kuwait oil workers entered an oil strike which for all intents and purposes had a bigger impact on oil prices, a reduction in crude output. Efforts from Organization of the Petroleum Exporting Countries (OPEC) and Russia to return to the negotiating table have kept the price of oil stable even though there has been few signs that the black gold glut is set to decrease anytime soon.

The European Central Bank (ECB) did not bring any new ideas to the table but did manage to avoid contradictions between its statement and the comments from its President Mario Draghi. The EUR traded in a wide range of 1.14 down to 1.1228 where it remains awaiting next week’s Fed monetary policy statement.

The U.S. Federal Reserve will release its Federal Open Market Committee (FOMC) statement on Wednesday, April 27 at 2:00 pm EDT. The market is not expecting a rate hike at this point and with no press conference following the publication of the statement the language of the document will be closely scrutinized for clues about the June 15 FOMC. The Fed has downgraded its rate hike expectations for 2016 citing global headwinds that have limited U.S. growth. So far employment remains the strongest pillar of said recovery but the job gains and the lowest unemployment claims in 42 years won’t be enough to sway the opinion of Fed members to vote for a rate hike until other economic gauges show improvement.

The USD rose against most of the major currencies ahead of the FOMC meeting. Only the CAD and the GBP managed to eke out gains against the greenback. The GBP/USD gained 1.21 percent this week to finish at 1.4386 after opinion polls are driving the market ahead of fundamental data releases. The Brexit referendum will accelerate until the vote with global media playing the outcome as too close too call, when in reality it could play out as another Scottish independence vote. Brexit news will add volatility to the market unless the media saturates the market leading up to a potential “Brexit fatigue”.

The CAD was boosted by the volatile price of oil caught in the after shocks of the failure to reach an crude output freeze agreement in Doha and the Kuwait oil strike. Good fundamental data boosted the loonie at the close of the week to finish at 1.2680. The USD fell versus the CAD 1.207 percent.

The European Central Bank (ECB) tried to not in its own way again after it released its monetary policy statement and press conference by president Mario Draghi. The EUR was gaining as Draghi kept talking only to start a sell off when the press conference was finished. The actual language did not differ much from previous interventions but the market cut profits ahead of next week’s opposite side of the monetary policy seesaw the Fed. The EUR/USD lost 0.637 percent last week.

Commodity currencies except the CAD had a volatile week that ended with the AUD/USD losing 0.22 percent and the NZD/USD down 1.071 percent after the Doha fallout created some upward momentum that disappeared as the week progressed and supply concerns capped the oil rally.

FOMC to Show Patient Fed Awaits More Signs of US Recovery

The main event next week will be the April 27 FOMC in Washington. The ECB has made it clear that low rates will continue in Europe for the time being unless growth picks up. Germany has never agreed on principle to the easing monetary policy and protest each time there is to be a new round of quantitative easing stimulus making even Draghi’s vague promises of deeper negative rates a tough sell on the market. The Fed is now in the spotlight, but if any central bank has learnt from the lessons of the past it seems its the Washington based institution. The Fed will not over promise and is willing to let the economy “run a little hot” with inflation before making an interest rate move. The April FOMC meeting does not feature a press conference with Chair Janet Yellen so the market will be scanning tough the statement for clues on the June FOMC which is still a heavy candidate for a rate hike before the U.S. presidential elections heat up. Foregoing June will force the Fed to a repeat scenario of last year where it waited until December to make the now historic rate hike.

Forex market events to watch this week:

Monday, April 25
4:00am EUR German Ifo Business Climate
Tuesday, April 26
8:30am USD Core Durable Goods Orders m/m
8:55am CAD BOC Gov Poloz Speaks
10:00am USD CB Consumer Confidence
9:30pm AUD CPI q/q
Wednesday, April 27
4:30am GBP Prelim GDP q/q
10:30am USD Crude Oil Inventories
2:00pm USD FOMC Statement
2:00pm USD Federal Funds Rate
5:00pm NZD Official Cash Rate
5:00pm NZD RBNZ Rate Statement
Tentative JPY Monetary Policy Statement
Thursday, April 28
1:00am JPY BOJ Outlook Report
Tentative JPY BOJ Press Conference
8:30am USD Advance GDP q/q
8:30am USD Unemployment Claims
Friday, April 29
4:00am CHF SNB Chairman Jordan Speaks
8:30am CAD GDP m/m
Saturday, April 30
9:00pm CNY 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