Week Ahead in FX: Greece’s Decision Day, Central Banks, NFP


The first week of June comes full of economic releases, official bank rate statements, Greek debt deadlines, and if that wasn’t enough, the biggest indicator in the forex market, the nonfarm payrolls report.

The U.S. will have a chance to regain the confidence of investors and boost the USD by relying on employment data, its strongest performer as the pressure of a weak first quarter hangs on the economy. Central banks will play a part, but it is expected to mostly be all words and no action as the Reserve Bank of Australia (RBA), Bank of England (BoE), and the European Central Bank (ECB) will keep interest rates unchanged.

Meanwhile, reports of a staff-level agreement between Greece and its creditors might have been greatly exaggerated. The Greek government continues to play a dangerous game of chicken hoping that the ECB, European Commission, and the International Monetary Fund will blink.

The calendar will have something for everyone as economic data for all major markets will be released with markets cross-eyed after keeping one eye on Greece and the rest on the U.S. economic performance.

Monday, June 1
4:30 a.m. — GBP manufacturing PMI
10:00 a.m. — USD ISM manufacturing PMI

Tuesday, June 2
12:30 a.m. — AUD RBA rate statement
4:30 a.m. — GBP construction PMI
9:30 p.m. — AUD GDP quarter-over-quarter

Wednesday, June 3
4:30 a.m. — GBP services PMI
7:45 a.m. — EUR minimum bid rate
8:15 a.m. — USD ADP nonfarm employment change
8:30 a.m. — CAD trade balance
8:30 a.m. — EUR ECB press conference
8:30 a.m. — USD trade balance
10:00 a.m. — USD ISM non-manufacturing PMI

Thursday, June 4
7:00 a.m. — GBP official bank rate
8:30 a.m. — USD unemployment claims
10:00 a.m. — CAD Ivey PMI

Friday, June 5
8:30 a.m. — CAD employment change
8:30 a.m. — USD nonfarm employment change

Monetary policymakers take the stage the week of June 1 to June 5 as three major central banks have interest rate announcements. There are no changes expected from the Reserve Bank of Australia (RBA), the European Central Bank (ECB), or the Bank of England (BoE). What is expected is a healthy dose of rhetoric. Current economic conditions do not warrant direct intervention, thus the policymakers will take the opportunity to share their views with the market regarding their respective economies.

RBA to Hold as Capital Investment a Concern

The RBA has tried to be proactive this year by cutting rates twice already. On February 2, the Australian benchmark interest rate was lowered to 2.25%, an all-time low. Citing a stronger Aussie and a weak economy, the central bank cut rates again in May 5 to 2%. In both cases, the market had anticipated these monetary policy actions because Governor Glenn Stevens made numerous statements about the strength of the currency hurting the economy and soft internal demand. The RBA is hoping that the current rate is enough to spur consumer spending, and get corporations to make capital investments by taking advantage of the low rates. But will it work? If it does, it’ll give Australia’s economy a badly needed boost.

Macroeconomic conditions do not setup expectations for another Australian rate cut so soon after the last one. A strong USD has helped depreciate the AUD which traded at 0.8140 in May 15, and now trades in the range of 0.7650/60. Economic growth forecasts continue to be subdued Down Under. That won’t encourage additional easing further down the line. Listen closely to the words Stevens uses in the policy statement; they will probably be tinged with pessimism. The market is still pricing a rate cut before the end of the year as the current levels have boosted the construction and housing industries, but not enough to offset the losses in the mining-related industries.

ECB to Balance QE with Greek Drama

The ECB is pleased with the positive results its €1.1 trillion quantitative easing (QE) program has achieved to date. There is no expectation of a rate change announcement next week. Even the expected verbal intervention by ECB President Mario Draghi will probably not be as impactful to the EUR as were the comments by French policymakers on May 19. Benoît Coeuré, a member of the ECB’s executive board, revealed the ECB will front-load its debt purchases to avoid an excess of bond buying during the quiet summer trading days. Christian Noyer, another ECB executive board member, said the ECB could go beyond the QE amounts already announced in order to hit its inflation target. The two statements reassured markets of the commitment from the eurozone’s policymakers to stick with its stimulus program until Europe’s economy shows signs of sustainable growth.

Central Banks to Hold Rates, Loosen Tongues

The EUR/USD regained some ground after those comments, only to have the economic reality of growth to lead the pair back above 1.10. The situation facing the ECB on the Greek front has not affected the EUR significantly, but remains a concern as the International Monetary Fund (IMF) repayment deadline approaches. The central bank is worried not only about the current debt talks bearing no fruit, but the effect it can have in other nation’s debt markets. There is a growing chorus of officials warning of the possibility of a Grexit.

BoE Unfazed by Deflation

The British benchmark rate is expected to remain at record low 0.50% when the BoE takes the stage on Thursday. The United Kingdom’s economy has slowed down from the impressive pace it achieved in 2013. The last quarter of 2014 saw a cooling of the optimism which made the BoE revise its forecasts ahead of last May’s U.K. federal election. With an empowered Conservative government firmly established in London, the BoE can now focus on inflation, or in this case, deflation. Governor Mark Carney has reiterated that the current deflationary state is transitory. Lower global oil and food prices have driven inflation down as consumers have not spent at the same rate with a net downward pressure on inflation.

Meanwhile, the Old Lady was caught in the headlines for leaked email communications that showed preparations for how the bank would handle the possibility of Great Britain exiting from the European Union. The project, called “Bookend,” is the bank’s main strategy to deal with a potential aftermath if the referendum planned for 2017 results in that reality.

The pound continues its downward trend after disappointing gross domestic product (GDP) data in the first quarter of the year. The GBP has fallen versus both the EUR and USD after a 0.3% growth was reported on a forecast of 0.4%. Interest rate divergence with the Federal Reserve, which is expected to raise rates before the end of the year, has depreciated the pound versus major currency pairs.

Central banks events to watch this week:

Tuesday, June 2 12:30 a.m. — AUD RBA rate statement
Wednesday, June 3 8:30 a.m. — EUR ECB press conference
Thursday, June 4 7:00 a.m. — GBP official bank rate

*All times EDT

USD Awaits Crucial NFP Report

American employment has been the strongest pillar of the economy with limited exceptions over the past two years.

The recovery of the unemployment rate pressured then Federal Reserve Chair Ben Bernanke as it does the current chair, Janet Yellen. Bernanke and Yellen played down the headline unemployment rate and urged the market to focus on the whole employment picture to reveal underperforming indicators. Wages have not kept up with the number of jobs resulting from the rise of part-time positions, self-employment, and small business employment. It’s difficult to know how solid the recovery really is.

The nonfarm payrolls (NFP) report will be published on Friday, June 5, and it will shed more light into the state of the American economy. Employment data will begin to emerge this week on Wednesday with the release of the ADP nonfarm employment change. This survey of private payrolls is not heavily correlated with the NFP, but it will get the market ready to digest the week’s employment data. The ADP report has underperformed expectations for the past four months. Last month, it printed 169,000 new jobs when expectations were of 199,000. Despite lower numbers the forecast calls for a lofty 200,000. Weekly unemployment claims are published every Thursday. This release has kept the employment recovery narrative going even when the NFP has disappointed. The U.S. has managed to keep its number of new jobless benefits applications under 300,000 for 12 straight weeks. The market anticipates this trend to continue into its 13th week, with a forecast of 277,000.

What Will the Numbers Show?


The March NFP report was a wake-up call when it missed estimates by 100,000 jobs. The U.S. economy added only 126,000 jobs when 246,000 were expected. The next report managed to come in close to expectations at 223,000, but the stumble at the beginning of the year raised questions about the overall economic performance in the first quarter. The stock market and the USD got a breather after being under pressure as the U.S. regained the confidence of the markets. The Fed’s comments about data dependency yet minimizing the effect of the unemployment rate, and the number of new jobs has reduced the impact of the NFP release, but it is still capable of driving the direction of the USD.

The U.S. has struggled to impress markets with one soft economic release after another. The USD is sometimes given a pass when the economy misses the mark just because of the Fed’s verbal intervention or by other central banks that wish to devalue their currencies to gain a competitive edge. The strength of the USD on the guidance of the Fed is tied to economic data. The first quarter took a toll on the economy and employment was one of the few indicators that managed to keep the numbers steady. In order for the USD to regain the price levels of last year, all indicators starting with NFP on Friday have to defy forecasts, and convince the Fed that a rate hike could be made sooner rather than later. Otherwise, more disappointing data will delay that monetary policy decision, or it might make it a token decision if the Fed raises rates later this year but cannot follow through for fear of bringing the economy to a standstill.

Employment events to watch this week:

Wednesday, June 3
8:15 a.m. — USD ADP nonfarm employment change
Thursday, June 4
8:30 a.m. — USD unemployment claims
Friday, June 5
8:30 a.m. — USD nonfarm employment change

*All times EDT

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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