Dollar Mixed on Improving December Rate Hike Odds

Market prices in a 80% chance of a rate hike in December

The USD is mixed on against major pairs ahead of the first jobs report this week. The dollar has struggled to appreciate against geopolitical factors at home and abroad. Last week the U.S. Federal Reserve through member speeches is still committed to tightening monetary policy despite some dissent in their ranks. Fed Chair Janet Yellen is the biggest name pushing for more interest rate raises sooner rather than later. Economic data releases between now and the final Fed meeting of the year will be crucial.

Employment data has been a solid pillar of the US economic recovery, but given the lack of wage inflation the reports are more heavily scrutinized in search of more solid growth signals. This week’s data will be affected by the tropical storms earlier in the month. The ADP Non-Farm Employment Change will be published on Wednesday, October 4 at 8:15 am EDT. Private payrolls are expected to slow down and fall to below 200,000.

The ISM Non-Manufacturing PMI will be published at 10:00 am EDT. Manufacturing indicators on Monday beat expectations and touched a 13 year high. Non-manufacturing is expected to improve 55.5 and the market will be following to see a similar reactions from the Service industry after the impressive manufacturing rebound. Fed Chair Janet Yellen will give a speech in St. Louis at 3:15 pm EDT. Improving data, in particular leading indicators that signal higher inflation could ignite another dollar rally after the CME FedWatch tool is already showing a 81.7 percent chance of the Fed funds rate hitting 125–150 basis points in December.

EUR/USD lost 0.039 in the last 24 hours. The single currency is trading at 1.1743 as the situation in Catalonia has stabilized but question marks remain about how united the Euro zone really is. Brexit anxiety has not helped the Euro as infighting within the Conservative party could steer the ship back to a hard breakup with Europe.

Central bank divergence between Europe and the United States continues. While the Fed is ready to hike at least once more in 2017 the European Central Bank (ECB) has been coy on how it will start tapering its QE program and/or move away from negative rates before the end of the year. Political turmoil in the US has kept the euro strength and even with a tax reform push from the Trump administration the greenback has failed to take full advantage of a supportive Fed.

Speeches from ECB head Mario Draghi and Fed Chair Janet Yellen on Wednesday could bring some clues into their thinking, but give that the context is not ideal there could be little in terms of actual information. Draghi will be inaugurating the ECB visitor center in Frankfurt, while Yellen will be at St. Louis delivering opening remarks for a community banking conference.

The GBP/USD lost 0.309 on Tuesday. Cable is trading at 1.3240 after Brexit terms within the Conservative party were at ends. The supporters of the Leave campaign had criticized openly the decision by British Prime Minister Theresa May to opt for a softer Brexit that would allow the UK to remain as part of the single market through an agreed payment. Boris Johnson was deeply set against this idea, but today he has backtracked and claims that the cabinet is united on May’s Brexit strategy.

Weak manufacturing data on Monday and a follow up by construction indicators on Tuesdays have hurt the pound. The currency has appreciated on the back of a potential rate hike by the Bank of England (BoE), but if the economy loses traction before the central bank pulls the trigger it could give Govenor Carney time to reconsider. Service PMI data will be released on Wednesday, October 4 at 4:30 am EDT. The reading is expected to be almost flat, but any risk to the downside will be quickly acted upon in the price of the GBP following the release.

Market events to watch this week:

Wednesday, October 4
4:30 am GBP Services PMI
8:15 am USD ADP Non-Farm Employment Change
10:00 am USD ISM Non-Manufacturing PMI
10:30 am USD Crude Oil Inventories
3:15pm USD Fed Chair Yellen Speaks
8:30 pm AUD Retail Sales m/m
8:30 pm AUD Trade Balance
Thursday, October 5
8:30 am CAD Trade Balance
8:30 am USD Unemployment Claims
Friday, October 6
8:30 am CAD Employment Change
8:30 am CAD Unemployment Rate
8:30 am USD Average Hourly Earnings m/m
8:30 am USD Non-Farm Employment Change
8:30 am USD Unemployment Rate

*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