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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

GMT

CCY

EVENT

ACT

EXP

PREV

23:21

AUD

CoreLogic RP Data House Px (MoM) (APR)

1.7%

-

0.2%

23:30

AUD

AiG Perf of Mfg Index (APR)

53.4

-

58.1

01:00

AUD

Melbourne Institute Inflation (MoM) (APR)

0.1%

-

0.0%

01:00

AUD

Melbourne Institute Inflation (YoY) (APR)

1.5%

-

1.7%

01:30

AUD

NAB Business Conditions (APR)

9

-

12

01:30

AUD

NAB Business Confidence (APR)

5

-

6

02:00

JPY

Nikkei Japan PMI Mfg (APR F)

48.2

-

48.0

05:00

JPY

Vehicle Sales (YoY) (APR)

7.2%

-

-3.2%

06:30

AUD

Commodity Index AUD (APR)

87.0

-

86.4

06:30

AUD

Commodity Index (YoY) (APR)

-9.4%

-

-15.6%

European Session

GMT

CCY

EVENT

EXP

PREV

IMPACT

07:00

CHF

Total Sight Deposits (APR 29)

-

490.9b

Low

07:00

CHF

Domestic Sight Deposits (APR 29)

-

425.1b

Low

07:15

CHF

Retail Sales Real (YoY) (MAR)

-

-0.2%

Low

07:30

CHF

PMI Manufacturing (APR)

52.9

53.2

Medium

07:55

EUR

Markit/BME Germany Mfg PMI (APR F)

51.9

51.9

Medium

08:00

EUR

Markit Eurozone Mfg PMI (APR F)

51.5

51.5

Medium

13:45

EUR

ECB Publishes Weekly, Monthly QE Holdings

-

-

Medium

14:00

EUR

ECB President Draghi Speaks in Frankfurt

-

-

Medium

Critical Levels

CCY

Supp 3

Supp 2

Supp 1

Pivot Point

Res 1

Res 2

Res 3

EUR/USD

1.1197

1.1308

1.1380

1.1419

1.1491

1.1530

1.1641

GBP/USD

1.4434

1.4527

1.4569

1.4620

1.4662

1.4713

1.4806

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

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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