Forex Markets Hinge on FOMC, NFPs
Forex markets were once again dictated by the US Dollar, with most of the market’s sentiment guided by the next expectations for stimulus programs. Any suggestion that the Federal Reserve is ready to start cutting back on quantitative easing stimulus will be positive for the Dollar. For forex markets, this would likely equate to new lows in the EUR/USD and yearly highs for the USD/JPY. Total market activity seen last week was the reverse of this, however, as a larger portion of the market is starting to position for the possibility that the Fed is open to prolonging these programs as long as labor market data shows that an unemployment rate above 6.5%.
The Australian Dollar was one of the big winners last week, as central bank expectations of Australia’s own have started changing as well. Specifically, the Reserve Bank of Australia (RBA) has released commentaries suggesting that further reductions in interest rates might not be necessary into the latter parts of the year. Forex traders had previously positioned for one more 25 basis point rate cut before the end of the year, so these latest revelations are bullish for the currency. This news is also important for the currency because the Australia Dollar is typically the highest yielder amongst the majors, and another reduction of 25 basis points in interest rates would mean that this is no longer the case. With no changes in monetary policy, the AUD will remain the most attractive option for forex traders looking to implement carry trade strategies.
The Week Ahead in Forex
Next week forex markets are likely to see some stalling in summer volatility (which is often the case at this time of year) but this will change into the latter sessions as the next FOMC meeting and Non Farm Payrolls give markets some additional direction from a fundamental perspective. If we see additional suggestions that the Fed is willing to continue pumping monetary stimulus into the economy, the Dollar should continue to weaken against the AUD, EUR, and JPY. For the most part, we have seen ambiguous statements from the Fed, essentially suggesting that quantitative easing programs are not on a “preset course.” But markets have interpreted these statements as pro-stimulus and the Dollar has been sold off once the statements are made public.
In addition to this, we will also have the monthly Non Farm Payrolls report, which is released in conjunction with the unemployment rate. Of course, this data is also important for central bank expectations, so there is the enhanced possibility of extreme volatility into the latter parts of the week. This will be especially true if we see conflicting information (for example, a pro-stimulus statement and strong employment numbers). Either way, forex traders should be prepared for increased price action as these results are made public. Prices are likely to see sideways moves early in the week, as there will not be many traders willing to commit to positions until the major event risks have passed.