US Dollar at 3 Month High After Dovish ECB Awaits Fed and Jobs Report

US tax reforms advance as ECB avoids taper tantrum

The US dollar is trading higher against all major pairs in a week with little data. The week ahead in markets will be full of indicators as well as political events that will impact markets.

The Bank of Japan (BOJ) will release its monetary policy statement near midnight Monday, October 30 EDT to be followed by the central bank’s outlook report and a press conference Tuesday, October 31 at 2:30 am EDT. Investors are not expecting a change in rates and the stimulus program, but see room in the economic outlook to introduce downgraded inflation expectations.

US jobs week will kick off on Wednesday, November 1 at 8:15 am EDT with the release of the ADP private non-farm payrolls report. Last month data was impacted by bad weather in the US and is expected to be higher than the 135,000. The forecast for private payrolls is a gain of 191,000. The Fed will wrap up its two-day monetary policy meeting on Wednesday and will release its rate statement at 2:00 pm EDT. A rate hike is forecasted for December given that the CME FedWatch Tool assigns close to 99 percent probability, but only 1.5 percent in the November 1 meeting.

The Bank of England (BoE) will host a Super Thursday on November 2 at 8:00 EDT when it released the quarterly inflation report, monetary policy, rate announcement, minutes and a press conference with BOE Governor mark Carney. The central bank is expected to raise rates by 25 basis points as inflation is rising above the target. The rate hike would mark the first lift to the borrowing rate in 10 years.

The grand finale of the week’s data deluge will come in the form of the biggest indicator in the market. The U.S. non farm payrolls (NFP) will be released on Friday, November 3 at 8:30 am EDT. Central bank monetary policy divergence is back on the table as a dovish ECB has boosted the US. A strong employment report with the emphasis on wage growth could once again spark a dollar rally if the Trump pro-growth policies continue to take form.

The EUR/USD lost 1.51 percent in the last five days. The single currency is trading at 1.1598 in the aftermath of the European Central Bank (ECB) decision to cut back the amount of bonds it would buy from the market down from 60 billion euros to 30 billion a month. The ECB was trying to avoid the move being read by the market as a tightening of monetary policy. The U.S. Federal Reserve had tried this previously and failed, when just the mention the central bank was going to reduce its QE program back in 2013 unleashed a surge in US Treasury yields as investors sold fixed income instruments.

To avoid a taper tantrum the ECB President also delivered a firm stance on keeping rates low and to reduce the aggressive cut in bonds, the central bank also extended the duration to the program. The EUR had risen on the back of hawkish comments from the central bank in the summer and while a taper was expected it was also known that the bank was pulling all the stops to avoid a tantrum. Mission accomplished. The EUR is lower as the QE program has been reduced but it is still open ended with low rates still the policy going forward.

The USD was higher after the ECB decision and climbed higher as the Trump Administration’s efforts to reform the tax code continue to move forward. The promise to reform taxes was one of the main drivers of the Trump rally after the US presidential election, but as the Administration focused on other fronts the greenback lost traction. Now back on track the currency is appreciating versus peers. Fed leadership uncertainty has also plagued the market, with the list of candidate apparently down to two. Fed Governor Jerome Powell and Stanford economist John Taylor. The financial press on Friday was pointing at Powell as the preferred pick, which was a negative for the USD as he is expected to continue on the same line as current Fed Chair Yellen. That does not necessarily mean he is dovish, but not as hawkish as the other option. There is still the possibility that Taylor gets appointed as Vice Chair, as both positions are open for the President to fill them.

Market events to watch this week:

Monday, October 30
Midnight JPY Monetary Policy Statement
Tuesday, October 31
Tentative JPY BOJ Outlook Report
Tentative JPY BOJ Policy Rate
2:30 am JPY BOJ Press Conference
8:30 am CAD GDP m/m
10:00 am USD CB Consumer Confidence
5:45pm NZD Employment Change q/q
Wednesday, November 1
5:30 am GBP Manufacturing PMI
8:15 am USD ADP Non-Farm Employment Change
10:00 am USD ISM Manufacturing PMI
10:30 am USD Crude Oil Inventories
2:00 pm USD FOMC Statement
2:00 pm USD Federal Funds Rate
8:30 pm AUD Trade Balance
Thursday, November 2
5:30 am GBP Construction PMI
8:00 am GBP BOE Inflation Report
8:00 am GBP MPC Official Bank Rate Votes
8:00 am GBP Monetary Policy Summary
8:00 am GBP Official Bank Rate
8:30 am GBP BOE Gov Carney Speaks
8:30 am USD Unemployment Claims
8:30pm AUD Retail Sales m/m
Friday, November 3
5:30 am GBP Services PMI
8:30 am CAD Employment Change
8:30 am CAD Trade Balance
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
10:00 am USD ISM Non-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