Dollar Stronger on Possibility Fed to Step up Tightening Pace

The US dollar rose on Tuesday against all major pairs. The greenback started to rally in April and even though the ISM manufacturing index was lower than expected it did little to dent the advance of the currency. Employment data will start trickling in on Wednesday with the release of the ADP non-farm private payrolls report at 8:15 am EDT. Later in the day the U.S. Federal Reserve will wrap up its two day Federal Open Market Committee (FOMC) meeting and issue a rate statement at 2:00 pm EDT.

  • US dollar higher due to strong data and faster rate hike path
  • ADP private payrolls to show rise above 200,000 jobs
  • U.S. Federal Reserve expected to leave rates unchanged

Fed to Hold in May with June Meeting Likely Candidate for a Hike

The EUR/USD lost 0.68 percent on Tuesday. The single currency is trading at 1.1996 despite the only economic indicator released that day the ISM manufacturing PMI came in under expectations at 57.3. The USD is getting a lot of support from the Fed’s comments on more rate hikes than originally priced in by the market. The CME Fedwatch tool has a small probability of a rate move in May, with 94.3 percent of staying at 150-175 basis points. The June odds are the same number but for a 25 basis points lift at 94.3 percent and even an outside chance of 5.7 percent of the benchmark reaching 200-225.

The Fed has stuck to an unwritten policy of raising rates only during FOMCs that feature press conferences to give more details on the decision. With three more rate hikes forecasted after the March rate hike (with press conference) and three press conferences left in the calendar (June, September and December) they become the most obvious candidates. Employment has been one of the strongest pillar of the economic recovery and the release of the ADP will be the preamble for the publication of the U.S. non farm payrolls (NFP) report on Friday, although the focus has shifted from job numbers to wage growth indicators.

The Personal Consumption Expenditures (PCE) was released on Tuesday and recorded an annual gain of 1.9 percent. Wage growth on Friday will be another insight into how strong is the inflationary pressure. GDP growth in the first quarter was better than expected, specially after the first three months of the year are seasonally sluggish and still they showed a 0.9 percent gain in wages and salaries, the largest increase since Q1 in 2017.

UK Manufacturing PMI Disappointment Sinks Pound

The GBP/USD lost 1.00 percent in the last 24 hours. The currency pair is trading at 1.3618 after the release of manufacturing and consumer lending data on Tuesday. The activity in UK factories grew at the slowest rate in 17 months at the same time that net lending to individuals slowed down as they opted to repay their loans.

The British economy had a slow start to 2018. Purchasing manager indices (PMIs) for manufacturing, construction and services have disappointed this year. With Bank of England (BoE) Governor Mark Carney surprising investors last week with comments suggesting the central bank could not hike rates in May, economic indicators, specially leading ones such as PMIs gain more relevance in trying to forecast the moves of the central bank. Carney has pointed out that mixed data could push out a rate rise until later this year.

The first PMI release this week does not bode well for a May rate hike by the BoE and the GBP paid the price. The currency reached a post Brexit high in April, but weak data in particular GDP and now manufacturing the market will be eyeing the Services sector that is due on Thursday, May 3 at 4:30 am EDT. The index is expected to improve on last month’s reading with a final 53.5 anything below will sound alarm bells for the pound and beating expectations could have limited upside.

Market events to watch this week:

Tuesday, May 1
6:45pm NZD Employment Change q/q
Wednesday, May 2
4:30am GBP Construction PMI
8:15am USD ADP Non-Farm Employment Change
10:30am USD Crude Oil Inventories
2:00pm USD FOMC Statement
9:30pm AUD Trade Balance
Thursday, May 3
4:30am GBP Services PMI
8:30am CAD Trade Balance
10:00am USD ISM Non-Manufacturing PMI
12:00pm CHF SNB Chairman Jordan Speaks
9:30pm AUD RBA Monetary Policy Statement
Friday, May 4
8:30am USD Average Hourly Earnings m/m
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