Dollar bulls return on confident Fed

The U.S. dollar and Treasury yields across the curve bounced higher after the Fed signaled that a June rate hike is still on the way. Monetary policy-makers acknowledged that there is some softness in the economy, but seemed confident that recent economic slowdown is likely to be temporary. Otherwise, there were no surprises in the statement.

The positive tone struck by the Fed was slightly surprising, especially as consumer consumption, inflation, and nonfarm payrolls all headed south in March. Having said that, I wouldn’t fight the Fed and take an opposing view unless softening data continues, forcing the Fed to change trajectory.

Traders’ attention will shift to Friday’s nonfarm payrolls and given the latest ADP private payrolls and ISM non-manufacturing figures, there’s potential for an upside surprise. Private payrolls came slightly above expectations at 177,000 and the employment component of the services index printed 51.4 which also indicates a rebound in NFP after a sluggish 98,000 jobs added in March.

A reading above 190K jobs tomorrow may provide additional support to the U.S. dollar, but it requires a pickup in wages for the rally to sustain on the short term, as such traders should look at the overall health of the ​jobs market. 

The most significant move in currency markets was not the JPY, which declined to a six-week low against the dollar, but the Aussie plummeting 1.5% yesterday. The commodity currency was pressured by falling iron ore and other base metal prices. Iron ore, coking coal, and copper fell 8%, 4.5% and 3% respectively. Meanwhile, gold resumed its downtrend falling by more than 1.1% since yesterday’s Fed decision.

In Europe, the final debate between Marine Le Pen and Emmanuel Macron did little to shift market expectations. With more than a 20% margin for Macron in the final round of Presidential Election voting, this seems to be fairly priced in the euro. Today’s services PMI figures across Europe and the UK aren’t likely to provide much direction to euro/U.S. dollar (EUR/USD) currency pair and British pound/U.S. dollar (GBP/USD) currency pair, with most traders preferring to wait for Friday’s NFP report before taking action.

About the Author

Hussein Sayed is chief market strategist at FXTM.