US dollar squeezed higher this week especially against the Euro and the JPY as market participants were looking for Mrs. Yellen speech on Friday evening to clear the path for a new rate hike. Until Friday’s speech, market was focusing on technical analysis and positioning for the events to come as there were little or no economic releases to influence levels.
Releases like Durable Goods Orders or Unemployment Claims are second tier data and usually during such a week traders are looking at the week ahead. In this case, this week will be a really important one, a market moving one, in the sense that the ECB (European Central Bank) is having its interest rate decision and press conference and one day after, next Friday, the NFP (Non-Farm Payrolls) in the United States is due.
Euro Looking Heavy
Euro traded with a heavy tone all week and it is no wonder as the PMI’s (Purchasing Managers Index) came at the start of the week at 16 months low. This cannot be good in light of the ECB meeting next Thursday and comes to confirm the extremely dovish tone the ECB had lately. EURUSD traded around 1.1200 all week with a dip into 1.1150 on Wednesday only for Friday to end at the lows in the 1.11 area. We would say the downside is still favored and we should see the 1.10 handle quite fast.
PPI (Producer Price Index) in Spain, for example, came extremely negative, way into the negative territory and this represents basically inflation at the producers level. It is believed that this inflation in time will be passed on to consumers and this is something that should worry any central banker in the Eurozone. That being said, it is believed that while the ECB will not cut again rates at their next Thursday meeting, the tone will still be dovish and therefore the Euro is not going to be able to bounce much, if at all.
NFP on Friday
The most important event this week is not going to be ECB meeting but the NFP on Friday, as it will pave the road for the next move the Fed is going to do. If the NFP release will beat expectations and, moreover, if labor participation rate is confirming the recent change in the downtrend it was for so many years, then it is a given that we will have a rate hike sooner rather than later.
Jobs creation in the United States is on the positive side for quite some time now and the unemployment rate is holding at a nice 5% level with next Friday’s expectations being at 4.9%. Again, any move lower in the unemployment rate coupled with wage increases and a higher labor participation rate will open the gates for a new rate hike. Considering the path of the two central banks, ECB and Fed, one cutting and keeping an ultra-low monetary policy and the other one starting a tightening cycle, then the dollar could only strive against its counterparts. We are also favoring a higher USDCHF coupled with a lower AUDUSD and GBPUSD, but the one pair that should travel the fastest to the downside should be the EURUSD.
Yellen Speech and the Fed Meeting
Last Friday, as mentioned earlier, Mrs. Yellen, the Chairwoman of the Federal Reserve of the United States, was being interviewed at Harvard, quite late into the trading day. All eyes were on any hints she might give with regards to a possible rate hike in June or July. She did say that if conditions improve, and she mentioned that in her opinion conditions will improve, especially on the labor market, then a rate hike in the coming months is due. Be it June or July, it doesn’t really matter anymore at this point in time, but Fed is going to act on June as a press conference is following after the interest rate decision.
Last year in December, after the first rate hike in quite some time, Fed said that four rate hikes are granted in 2016, only for the start of 2016 to see that number reduced to two. The one thing that is stopping the Fed to be more hawkish is inflation and that is the key to all central banks decisions from this moment on. When and if inflation is going to pick up, there will be a rush in all central banks jurisdictions in the world to start raising rates and the hope there is not to have a hyperinflation environment.
Normally this should not be the case in large and strong economies, but one can never tell what is going to happen from a macroeconomic point of view as, like Yellen said last Friday, Fed did not see the financial crisis coming. So why seeing the next one?