US Dollar Looking Sharp Ahead of Fed

NFP May Spark Major Moves

by Bogdan Giulvezan

The greenback made massive advances on Friday after the Fed’s favorite inflation measure showed that inflation is accelerating, thus making the case for earlier interest rate hikes. The Personal Consumption Expenditures (PCE) price index increased by 0.3% on a month-over-month basis, bringing the yearly inflation to 4.4% (fastest gain since January 1991). The core version of the PCE price index showed a 0.2% rise (month over month), bringing the yearly figure to 3.6%, which is the fastest gain since May 1991.

The Euro plunged against the US Dollar and the Pound as ECB President Christine Lagarde failed to diminish market expectations of rate hikes. European inflation increased in October, as shown by the CPI data released Friday (actual 4.1%; forecast 3.7%), which added more volatility to the single currency.

Key Events for the Week Ahead

The week opens with the U.S. ISM Manufacturing PMI, released Monday at 2:00 pm GMT. The survey reveals insights into the state of the manufacturing sector as viewed by purchasing managers from said sector and acts as a leading indicator of economic health. The expected number is 60.4, a slight drop from the previous 61.1.

The scene will be mostly calm until Wednesday evening when the FOMC will release the Statement that contains the outcome of the interest rate vote and the reasons that stood behind it. Of course, the rate is not expected to change but commentary about the pacing of the asset purchase tapering and possible clues about the next rate hike will be of major interest. The release is scheduled for 6:00 pm GMT and will be followed at 6:30 pm GMT by the usual FOMC press conference, which will likely add more volatility.

Friday the ever-important Non-Farm Payrolls report comes out, alongside other key elements that help paint a better picture of the U.S. jobs market: the Average Hourly Earnings and the Unemployment Rate. Considering that Fed officials have stated many times that asset purchases tapering and rate hiking are closely related to the jobs market, this week’s NFP will hold even more importance. The release is scheduled at 12:30 pm GMT and the expected change is 397K, a hefty increase from the previous 194K.

Technical Outlook – EUR/USD

The pair is currently trading at 1.1570 after a massive drop that started at the confluence zone created by the 50 days Moving Average, the upper border of the descending channel, and the horizontal level at 1.1700.

The US Dollar is on fire right now and it looks like it can extend the gains, taking the pair into the key support at 1.1500 and even lower, into the bottom border of the descending channel. Let’s not forget that the pair is in a long-term downtrend, which makes the last move up a retracement that is usually followed by trend resumption. The current bias is bearish but attention should be paid to this week’s releases, which could change the tide quite rapidly.