Week Ahead USD looks to NFP after Confident Fed

Fed Chair Yellen Gives Little Details on When Next Hike Will Come

The USD appreciated across the board after U.S. Federal Reserve Chair Janet Yellen gave her speech at the Jackson Hole central bank summit with a positive take on the economy. Chair Yellen recapped the upgrades to monetary policy undergone through the crisis of 2008 and felt confident that based on the strength of employment the outlook is positive for the economy building a case for a rate hike. Missing from the speech was the actual timing of the suggested rate hike.

The market focused on the Fed Chairs line: “I believe the case for an increase in the federal funds rate has strengthened in recent months” but equally important for the eventual rate hike is the next sentence: “Of course, our decisions always depend on the degree to which incoming data continues to confirm the Committee’s outlook.” Making it clear that despite the hawkish tone, the Fed’s next move remains data dependant. The fate of the September rate hike will rely on the next employment, retail sales and inflation releases.

Employment has been the strongest pillar of the U.S. economic recovery but at near full employment it has struggled to justify a rate hike on jobs data alone. The U.S. non farm payrolls (NFP) report will be published on Friday, September 2 at 8:30 am EDT. The words by Yellen at Jackson Hole has once again made the NFP report the biggest indicator for the market could decide the future of the September rate hike.

The EUR/USD lost 0.777 percent in the last five days. The single currency is trading at 1.1254 after trading flat for most of the week ahead of U.S. Federal Reserve Chair Janet Yellen speech at the Jackson Hole summit. The words from Chair Yellen while not the strongest of endorsements for a rate hike in September, did boost the USD across the board.

Economic indicators were scarce in the week starting August 22. In Europe the German Ifo business climate surprised to the downside with its lowest reading since February as delayed shocks from Brexit start to worry German analysts. Durable goods in the U.S. came in higher than expected with a 1.5 percent gain in a positive sign that companies are spending.

The views on the Fed are split. On one hand some investors expect the Fed to deliver clear signals of an impending rate hike at Jackson Hole summit. The host of the summit is Kansas City President Esther George, the only dissenter in the Federal Open Market Committee (FOMC) that voted for a rate hike in the last two meetings. The other side of the argument is that there is rising uncertainty in the effectiveness of the easing monetary policy actions of the Bank of Japan (BOJ), the Bank of England (BoE) and the Bank of England (BoE). Hiking now, even at a token 25 basis points might mean a rate cut that could have been avoided by showing patience.

For now Yellen has bought the USD some strength but it depends on U.S. data validating the case that the economy is on a moderate but consistent pace of growth. Economic indicators that contradict that view could end up pressuring the USD as the September rate hike is already a long shot, but as per the Fed still a live possibility.

West Texas oil lost 2.761 percent in the last five days. The price of crude is trading at $46.77 after Organization of the Petroleum Exporting Countries (OPEC) optimism about a possible oil freeze was deflated after the comments from the Saudi Energy Minister who played down the possibility of a freeze and rather focused on a pick up in demand that is imminent only to OPEC members. U.S. crude inventory data continue to show a rise in stock as demand even during the driving season has not offset a supply glut.

The main highlight of the week will be the release of the NFP report by U.S. Bureau of Labor Statistics. Central banks have struggled when communicating with investors and with forward guidance a thing of the past, now monetary policymakers have abused rhetoric leaving a confused market and a diluted power of verbal intervention. A strong report will keep the September rate hike on the table, but a disappointing addition of jobs could complicate the possibility of higher rates ahead of the U.S. presidential elections in November. The September Federal Open Market Committee (FOMC) could be too close for comfort for U.S. policy makers as there is little urgency in raising rates in a global low rate environment.

Market events to watch this week:

Monday, August 29
9:30pm AUD Building Approvals m/m
Tuesday, August 30
10:00am USD CB Consumer Confidence
Wednesday, August 31
8:15am USD ADP Non-Farm Employment Change
8:30am CAD GDP m/m
10:30am USD Crude Oil Inventories
9:00pm CNY Manufacturing PMI
9:30pm AUD Private Capital Expenditure q/q
9:30pm AUD Retail Sales m/m
9:45pm CNY Caixin Manufacturing PMI
Thursday, September 1
4:30am GBP Manufacturing PMI
8:30am USD Unemployment Claims
10:00am USD ISM Manufacturing PMI
Friday, September 2
4:30am GBP Construction PMI
8:30am CAD Trade Balance
8:30am USD Average Hourly Earnings m/m
8:30am USD Non-Farm Employment Change
8:30am USD Unemployment Rate

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

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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