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USD Firms After FED Confirms Data Dependency

By: 2019-05-02 09:36:36


With financial markets in Japan and China closed for the rest of the week and many markets in Europe closed for the May Day holiday, Forex markets have had a relatively calm response to the US FOMC meeting.

Even if all the major money centers were fully open, there was no reason to expect the FED to materially shift their monetary policy posture.

As expected, the US central bank's economic assessment was modified to take into account the stronger growth impulses reflected in last week's Q1 GDP report, and the FED governors recognized the transitory headwinds stemming from the partial government shutdown and the harsh winter weather, which extended into March.

A few hours before the FOMC meeting, the ADP private employment report blew past expectations of 180,000 to print a 9-month high of 275,000 new private sector jobs during the month of March.

FED chief Jerome Powell made references to the robust jobs market but that moderate growth in wages has yet to filter its way into the governments inflation metrics.

This was clear in last week's GDP report which showed the GDP price deflator has slipped from 1.6% to 0.9% since the end of Q4. On a more upbeat tone, the March PCE deflator only fell from 1.4% to 1.3%, which is what the FED targets more frequently than the long-run core inflation data.

Mr Powell also noted that the US 2yr to 10yr yield curve has steepened by over 12 basis points since the last economic assessment back in March, which, in our view is more a function of market pricing than any express transmission of FED monetary policy.

With the FED comfortable in the current "data dependency" posture, Friday's US Non-Farm Payroll (NFP) data will take on added significance for the major Forex pairs.

Taking into account that the ADP data is not regularly a reliable proxy for the NFP report, the consensus forecast for the jabs data is for 180,000 new jobs, which pencils out to an unchanged unemployment rate of 3.8% , with a rise of hourly earning from 0.1 to 0.3%.

With only a few first-tier economic report scheduled until the US NFP, we see scope for the major currency pairs to trade within last week's ranges.

The bounce in the EUR/USD was capped just above the 30-day moving average near 1.1250. The daily RSI is tracking below 50.00 and the internal momentum indicators are still pointing lower. 

Despite being closed the next five trading days, the USD/JPY posted a two-week low of 111.05 as US equity markets dropped across the board in today's session. The next key support level is found near 110.80.

The AUD/USD continues to find stiff price resistance in the .7070 to .7090 range. The daily RSI is just under 40.00 and pointing lower, which suggests another test of the .7000 area in the near-term. 

Similar to the US FOMC, the Bank of England is not expected to make any changes to their interest rate policy at their meeting later today. The GBP/USD posted a three-week high at 1.3105 last night and now looks to be back in the sell zone on the daily charts.