FOMC ’Transitory’ Take Sets Stage for Non-Farm Payrolls

2017-05-04 13:30:00 James Stanley

Talking Points:

- Yesterday’s FOMC announcement produced no changes to rates and no discussion around the balance sheet, but the inclusion of the term ‘transitory’ in regards to a recent slowdown in data was taken to infer that the Fed remains on track with their 2017 rate hike plans.

- This produced a quick-blip outside of the prior range on DXY; but USD/JPY put in a noticeable move of USD-strength while EUR/USD has put in a noticeable move of USD-weakness. This can be usable for and around tomorrow’s Non-Farm Payrolls report.

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Yesterday’s Federal Reserve meeting very much went as expected: There were no changes to rates and the Fed did not mention anything about the balance sheet in their statement. What did seem to catch the ear of market participants was the term ‘transitory’, in regards to a recent tilt-lower in U.S. economic data. This phrase was seemingly dismissing the idea that the Fed might back down from their rate hike plans due to a softening in data; and the corresponding impact was a quick-pop higher in the Greenback as the risk trade caught another leg of extension.

But given that backdrop, and also given the fact that the Fed’s next rate decision in mid-June is expected to bring a rate hike, more emphasis is placed on near-term data prints out of the United States, all in the effort of gauging whether that next rate move in June might actually happen. We don’t have to wait long to get into U.S. data, as tomorrow brings Non-Farm Payrolls for the month of April. The expectation is for 190,000 jobs to have been added to American payrolls last month; and if this number prints above the expectation we’ll likely see some additional bullish drive in the U.S. Dollar.

On the chart below, we’re looking at the recent range in the U.S. Dollar. Shortly after yesterday’s FOMC rate decision, the Greenback caught a quick bid-above resistance, only to fall back within the prior range just hours later. But buyers have stepped-in above prior range support; and we may be looking at the early stage of a new top-side move, which will likely be determined by tomorrow’s NFP report.

Chart prepared by James Stanley

Given the bifurcated reaction in the Greenback around yesterday’s rate decision, traders can deductively use this to strategize around the Dollar. We had discussed this theme earlier in the week in the article entitled, U.S. Dollar Strategy Planning with USD/JPY and EUR/USD; and this premise is very much still alive and work-able.

USD/JPY for USD-Strength Scenarios

Along with the return of the risk trade around French elections was the re-ignition of Yen weakness that had been rather pervasive after the U.S. Presidential election. But after six weeks of an aggressively bullish-move, USD/JPY spent much of the next four months heading-lower. But support was set shortly after the open of the weekend of French elections, and since then the pair has seen a meteoric rise of bullishness.

The Fed-inspired move from yesterday catapulted price action in USD/JPY above a key area of support/resistance, comprising the zone from 111.61-112.50; and there was also a top-side break of a bull flag formation. Both of these qualities are very bullish, and for longer-term bullish USD strategies, USD/JPY will remain as one of the more attractive candidates. This prior zone of potential resistance can now be re-assigned as support for continuation strategies.

Chart prepared by James Stanley

EUR/USD for USD-Weakness Scenarios

While the Dollar is relatively strong against the Japanese Yen, it’s relatively weak against the Euro. Last week brought another ECB meeting to markets and, as has become usual, Mr. Mario Draghi did his best to try to ‘talk down’ the currency. And it worked, for about an hour or two, but bulls returned shortly thereafter to bid prices higher yet again. So, even though the European Central Bank has rolled out no plans to stop or even slow their bond purchases, market participants are seemingly expecting that the bank will inevitably pullback as inflation data continues to show signs of improvement.

On the chart below, we’re looking at the bullish trend channel that’s built-in thus far in 2017. Two weeks ago, the pair gapped-higher after French elections, and has since traded within a relatively-confined range with 1.0933 helping to form resistance.

Chart prepared by James Stanley

On the shorter-term chart below, we’re dialing-in on that recent range in EUR/USD, and this includes the quick tilt-lower seen in the pair after last week’s ECB meeting.