The Central Bank Entourage: FOMC, BoJ, BoE Headline Next Week

Talking Points:

- This morning’s NFP report beat expectations, but lagging wage growth failed to inspire a bullish-run in the U.S. Dollar. A key support level in the Greenback has come into-play post-NFP (shown below).

- Next week brings a flurry of Central Banks. The Fed is widely-expected to hike; but we also hear from the Bank of England and the Bank of Japan.

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This morning’s non-Farm payrolls came-in at 235k jobs added in the month of February. This beats the expectation of 190k, and sets forth a fairly accommodating back-drop for next week’s widely expected rate hike from the Federal Reserve. But coming into this morning, it didn’t seem as though there was even much question for the Fed’s rate decision next week, as odds for a hike were running near-100%.

The bigger question, at this point, is what surrounds next week’s rate hike as far as the Fed’s forward-looking plans. The two rate hikes that we have seen over the past couple of years haven’t been received all-that-well by markets. The first rate hike in nine years, taking place in mid-December of 2015, triggered a fairly-strong pullback in the first six weeks of 2016. And the second rate hike in mid-December of 2016 led into a fairly-strong pullback in the Dollar through the month of January as it didn’t appear that markets were ‘buying’ the Fed’s idea of three full rate hikes in the calendar year of 2017.

But matters can change quickly: Odds for that March rate hike shot-up from 40% to open last week to over 90% by close of business on Friday. This was seemingly prodded-higher by a series of hawkish Fed speeches and the Joint Address to the Union from U.S. President, Donald Trump.

Despite this morning’s NFP-beat, the U.S. Dollar sold-off to a key zone of support while still remaining in the bullish trend-channel that’s contained most DXY price action since early-February. This is at least somewhat-indicative of next week’s rate hike being priced-in to markets; and within this morning’s report, wage growth was rather meek so it appears as though we’re seeing traders and investors already looking ahead to gauge how dovish or hawkish the bank might be while posing that next rate hike:

Chart prepared by James Stanley

The current zone of support is extremely interesting for the longer-term bullish formation in the U.S. Dollar. The level at 101.53 is the 50% Fibonacci retracement of the January move-lower, and at 101.55 we have the 23.6% retracement of the bullish move that started in early February.

Chart prepared by James Stanley

BoJ is Early Thursday Morning (Late Evening Wednesday for the U.S.)

The big question here is how confident the BoJ might be around the ‘Trump Trade’. We discussed this ahead of the Bank of Japan’s meeting in early-February, and this case is pretty much the same today. The Bank of Japan received a veritable gift with the Trump trade, as Yen-weakness became a predominant theme after the election of U.S. President, Donald Trump. This additional insertion of Yen weakness as the Dollar’s rise continued removed a considerable amount of pressure from the bank after their widely-panned ‘stealth’ move to negative rates last year appeared to blow-up in their face, threatening to wipe away around $4 Trillion and years’ worth of QE-efforts.

But now that Yen-weakness has shown back-up, is the BoJ feeling confident enough to begin talking up the prospect of ‘less QE’ or, perhaps even, a possible rate move later in the year?

It’s still probably a bit early for that, as the BoJ has made a noticeable shift to be ‘gentler’ with markets after last year’s negative rate move. But as has become usual with these no-move Central Bank announcements, the driver will be in the details, and if Mr. Kuroda is feeling optimistic enough to start being ‘less dovish’ we could see a pullback in the trend of Yen-weakness.

For its part, USD/JPY does not appear to be holding out any hawkish-expectations from the BoJ. USD/JPY broke out of a symmetrical wedge formation earlier in the week and then put in a cross of a key resistance level at ¥114.96. The move is a bit extended now, even with the small pullback seen post-NFP. But this does open the door for potential higher-low support ahead of next week’s Central Bank entourage. Below, we look at two potential areas.

Chart prepared by James Stanley

BoE is on Thursday Morning

The Bank of England also hosts a rate decision next week, but there’s little hope for any new information here. The BoE recently updated growth and inflation forecasts at their most recent Super Thursday in December. Curiously, growth forecasts were upgraded by ~42% (to the expectation of 2% GDP growth from a prior 1.4%); but inflation forecasts were actually down-graded. This only adds to the befuddlement of the economic situation in the U.K.’s post Brexit-environment where there is very little by way of certainty.

For currency traders, the big hope is that the BoE offers a hat tip towards inflation. The bearish side of Cable can be difficult to work with at the moment given price action’s stance near 30-year lows; it may be difficult to imagine that there is much more juice to squeeze there unless some additional negative shifts are observed within the U.K. economy. But the upside of the pair is also challenging, as bears have been rather persistent and anytime Cable shows some element of bullishness, bears have come right back in to squash those hopes.

Since the flash crash in early-October, GBP/USD has been caught in a range. It’s not a very clean range, as the support area of this setup is about ~170 pips wide. But since the flash crash, buyers have come in around the 1.2000 area on multiple occasions.

Chart prepared by James Stanley

--- Written by James Stanley, Analyst for DailyFX.com

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