FX Trading focus: Three things to watch through June 16 FOMC meeting
Another day brings another bout of bottled up, inconclusive market action, as nearly everything is mean reverting within a range or against recent trends, of which there are too few. As noted in the summary for this article and in yesterday’s FX Update, the market is on very uncertain footing on the outlook for the US dollar as the Fed continues to ever-so-cautiously hint that the taper discussion is finding its way into their consciousness. Until we get a signal from the Fed or some forcing from drama in commodities (especially crude) we may be stuck in limbo across the board in the major currencies.
Three things to look for from now until the June 16 FOMC meeting. First is whether the ISM Services employment sub-index is also weak and the ADP payrolls data and/or official Nonfarm payrolls data Friday suggests that the jobs market comeback is disappointing. That sets up a possible worst possible outcome for the Fed from here: the risk of stagflationary outcomes in which inflation continues to march higher, but companies are unable to either find the qualified workers to fill positions or to increase wages significantly for existing workers. Alternatively, very strong payrolls data is more straightforward and is the single data point most likely to trigger more taper talk sooner rather than later and a firmer USD. Second, the May CPI release is up next Thursday and could prove the highest print of the cycle, with the headline expected at 4.6% and the core year-on-year at 3.4%, which would be the highest since the early 1990’s and hard for the Fed to ignore – setting up a massive focus on the next batch of Fed forecasts. Third and finally: the oil price as oil prices are a key inflationary input and crude has seen a breakout above important range resistance this week. The Fed may start losing its cool if WTI is trading well north of 70 dollars a barrel ahead of the meeting.
An interesting test ahead for USD pairs as noted above as EURUSD has stalled out in a tight range after breaking above 1.2180 over two weeks ago. As noted above, anything that finally moves the Fed’s actual rate expectations sharply higher could support the USD within the recent range here, at least seeing the pair testing back toward 1.2000, while stagflationary data (hot inflation, weak payrolls growth) could keep the pressure on the US dollar.