Fed March Rate Hike Already Priced in as Markets Await ADP Payrolls

The U.S. dollar rose against major currencies on Tuesday ahead of employment data to be released this week. Comments from U.S. Federal Reserve members quickly shifted the expectations on the actions of the central bank when they meet next week. Chair Janet Yellen has made clear waiting for too long to hike could be a mistake. On February 14 Richmond Fed President Jeffrey Lacker said that “rates need to rise more briskly than the markets now seem to expect” as indicators such as the CME’s FedWatch tool where showing less than 20 percent probability of a rate hike in March. The market anticipated the Fed to rely on the U.S. Federal government to boost growth but as those pro-growth policies have not been expedited the reflation trade lost momentum. The Fed got busy signalling that it will further tighten in March, as those growth policies might not be coming soon, but are still present in mid to long term scenarios.

The always data dependent Fed Chair has said that if the data holds up there should be a rate hike in March. The only major release between that statement and the Federal Open Market Committee (FOMC) meeting on March 15 is the U.S. non farm payrolls (NFP) and the ADP a couple of days earlier. The ADP Non-farm employment report will be published on Wednesday, March 8 at 8:15 am EST (1:15 pm GMT). The forecast calls for 184,000 news jobs added in February. There is no direct correlation between the private and government jobs reports, but higher payrolls in the private sector would be a positive for the U.S. dollar.

The economic calendar on Wednesday, March 8 will also feature the release of the Annual Budget in the U.K. (7:30 am EST / 12:30 pm GMT), U.S. crude oil stock inventories at 10:30 am EST (3:30 pm GMT) and Chinese inflation data at 8:30 pm EST (1:30 am GMT Thursday). The release of the ADP data on Wednesday will start a daily employment indicator for the U.S. that will be followed by weekly unemployment claims on Thursday and closing the week with the NFP jobs report.

The EUR/USD lost 0.087 percent in the last 24 hours. The single currency is trading at 1.0572 ahead of employment data to start hitting the wire. The strong rhetoric from the Fed changed market perception on the upcoming FOMC meeting. While it was 20 percent probability of a hold and 80 percent for no change, it now stands inverted. Fed officials pushed hard to avoid miscommunication and the U.S. has traded higher as more investors update their estimates.

The USD/MXN lost 0.523 in Tuesday’s trading. The currency pair is trading at 19.4578 continuing a positive trend for the MXN after the Mexican central bank started its peso hedge auction. Banxico announced it would auction $20 billion. The first auction of $1 billion was a success as it was oversubscribed.

U.S. diplomat’s comments have also boosted the currency as the harsh anti-trade stance of the Trump administration softened in February.

The peso rally has slowed down ahead of the expected Fed rate hike in March but for the most part the negative factors that pushed down the currency have taken a back seat.

The XAU/USD lost 0.693 percent in daily trading. The yellow metal is trading at $1,217.15 as the March FOMC approaches with heavy anticipation of a rate hike by the Fed. The lack of details on the Trump administration fiscal and infrastructure spending policies has reduced the appetite for gold as an inflation hedge, while at the same time the Fed is willing to tighten putting pressure on the commodity.

Gold is lower ahead of the employment releases this week as the forecasts call for strong numbers that would justify the Fed in hiking at their March meeting.

Market events to watch this week:

Wednesday, March 8
7:30am GBP Annual Budget Release
8:15am USD ADP Non-Farm Employment Change
10:30am USD Crude Oil Inventories
8:30pm CNY CPI y/y
Thursday, March 9
7:45am EUR Minimum Bid Rate
8:30am EUR ECB Press Conference
8:30am USD Unemployment Claims
Friday, March 10
4:30am GBP Manufacturing Production m/m
8:30am CAD Employment Change
8:30am USD Non-Farm Employment Change

*All times EST
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