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US Dollar to Refocus on Fed Policy Bets as BOJ Impact Fades

US Dollar to Refocus on Fed Policy Bets as BOJ Impact Fades

Ilya Spivak, Head Strategist, APAC

Talking Points:

  • Markets’ focus to return to Fed rate bets as post-BOJ volatility recedes
  • US Dollar may be more responsive to upbeat vs. soft April ISM figures
  • NZ Dollar extends gains on neutral RBNZ posture, Yen corrects lower

A relatively quiet economic calendar in European trading hours puts the spotlight April’s Manufacturing ISM print out of the US. Expectations point to a slight slowdown in the pace of factory-sector growth. US news-flow has increasingly softened relative to consensus forecasts in recent weeks, opening the door for a downside surprise.

Last week’s FOMC policy announcement pointedly de-emphasized external risks and appeared to push investors back toward a focus on domestic developments as the key to policy bets. With that in mind, a soft ISM print may undermine near-term rate hike speculation and weigh on the US Dollar. It may likewise boost risk appetite, offering support to sentiment-sensitive currencies such as the Australian Dollar.

With that in mind, it is important to consider that priced-in tightening expectations implied in Fed funds futures have broadly firmed even as US data outcomes soured over the past three weeks. Indeed, the greenback’s sharp losses late last week seemed to owe more to knock-on effects from a BOJ-inspired USD/JPY drop rather than anything explicitly US-related.

This may imply that the markets may shrug off a soft ISM print absent a truly abysmal outcome. Alternatively, an upside surprise the clashes with recent trends may trigger a scramble to readjust portfolios and inspire outsized volatility. Needless to say, the US unit is likely to trade higher against most of its top counterparts in this scenario.

A quiet start to the trading week saw the major currencies trading little-changed overnight. The New Zealand Dollar narrowly outperformed as 3-month borrowing costs edged higher, hinting the move reflected follow-on from last week’s RBNZ rate decision. The Japanese Yen corrected slightly lower having enjoyed the strongest rally in a month last week.

Are FXCM traders buying or selling the US Dollar? Find out here !

Asia Session

GMTCCYEVENTACTEXPPREV
23:21AUDCoreLogic RP Data House Px (MoM) (APR)1.7%-0.2%
23:30AUDAiG Perf of Mfg Index (APR)53.4-58.1
01:00AUDMelbourne Institute Inflation (MoM) (APR)0.1%-0.0%
01:00AUDMelbourne Institute Inflation (YoY) (APR)1.5%-1.7%
01:30AUDNAB Business Conditions (APR)9-12
01:30AUDNAB Business Confidence (APR)5-6
02:00JPYNikkei Japan PMI Mfg (APR F)48.2-48.0
05:00JPYVehicle Sales (YoY) (APR)7.2%--3.2%
06:30AUDCommodity Index AUD (APR)87.0-86.4
06:30AUDCommodity Index (YoY) (APR)-9.4%--15.6%

European Session

GMTCCYEVENTEXPPREVIMPACT
07:00CHFTotal Sight Deposits (APR 29)-490.9bLow
07:00CHFDomestic Sight Deposits (APR 29)-425.1bLow
07:15CHFRetail Sales Real (YoY) (MAR)--0.2%Low
07:30CHFPMI Manufacturing (APR)52.953.2Medium
07:55EURMarkit/BME Germany Mfg PMI (APR F)51.951.9Medium
08:00EURMarkit Eurozone Mfg PMI (APR F)51.551.5Medium
13:45EURECB Publishes Weekly, Monthly QE Holdings --Medium
14:00EURECB President Draghi Speaks in Frankfurt --Medium

Critical Levels

CCYSupp 3Supp 2Supp 1Pivot PointRes 1Res 2Res 3
EUR/USD1.11971.13081.13801.14191.14911.15301.1641
GBP/USD1.44341.45271.45691.46201.46621.47131.4806

--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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