Today is Labour Day, which is celebrated by most of the countries around the world and the majority of bourses are closed today. But two countries will be running theirs, which are the UK and the US. During the European morning we get the important UK manufacturing PMI data. During the US morning, we will get the US ADP nonfarm employment change figures for the month of April, together with the ISM manufacturing PMI for the same month. But the spotlight will fall today on the FOMC statement, which will be followed by a press conference with Jarome Powell.
The markets will be monitoring the FOMC monetary policy decision very carefully today in search for any hints of a potential rate cut by the end of the year. The rate most likely will remain the same during this rate decision, but the big question now is, will it remain the same by the end of the year? According to the CME’s FedWatch Tool today, the probability for a possible rate cut in December has now increased. A chance to see a 25bps cut is now showing a 41.3% probability versus the 34.8% of keeping it at current levels. That said, this could still change, especially if economic data continues to be stable as it had been up until today.
The first quarter GDP grew 3.2% YoY and unemployment number is at its lows, at 3.8%. The S&P 500 and the Nasdaq Composite are at their highs, with the Dow Jones Industrial Average slightly lagging behind, but still showing good results. This week’s personal spending number for March was at its highs, at +0.9%, and the headline inflation is at +1.9%, which is near the Fed’s 2% target.
But there is one piece of US economic data that worries the Fed a lot, is the YoY core personal consumption expenditures deflator number, which came out on Monday lower than expected, at +1.6% for the month of March. Two months ago, it was near the Fed's target, at 2%. This decline in the number might raise some concerns in the Fed.
From the beginning of this week, the US dollar index has been in a decline-mode. The greenback has been weakening against most of its major counterparts. The USD was only capable to fight back against the NZD during the Asian morning today, as New Zealand released their employment change number, which was not as good as expected. Even though the unemployment rate remained the same, at 4.2%, the 1Q employment change was much lower than expected. The forecast was sat at +0.5%, but the result was -0.2%, which forced the News Zealand dollar to sell off a bit.
US will release its ADP nonfarm employment change figure for the month of April, which is expected to have improved from the previous 129k to 181k. Some investors like to monitor this index and use it as a gauge to the upcoming US NFP numbers on Friday. That said, this is not an accurate measure, as we have seen several times there is not always a correlation between the two. One good example was the previous ADP release, which forecasted a 170k employment rise, but delivered only 129k. Two days later, we received the NFP figures, which were already expected to come out way better than the previous, at 180k, but the real number showed up at 196k. That is why we will just wait for the release and see how the market reacts to that.
Another important piece of data that will come out is the US manufacturing PMI data for April, which is expected to have ticked down slightly from the previous 55.3 to 55.0. If so, this could paint a worrying for the US government picture, as the index would continue with its decline from the beginning of autumn last year.
Yesterday, the British pound attracted a lot of buying interest, which placed GBP higher on the scoreboard against its major counterparts. GBP/USD in particular, managed to break above its short-term downside resistance line drawn from the peak of March 13th. At the same time, the pair also got back above its tentative upside support line taken from the low of March 10th. As long as the rate continues to trade above both of those lines, we will stay positive, at least for a while.
A push above the 1.3050 barrier, where the rate was held yesterday, could increase the pair’s chances of a further move higher. The next potential target might be near the 1.3080 obstacle, which temporarily acted as an intraday support on April 16th. If that obstacle is no match for the bulls, GBP/USD could easily make its way to the 1.3120 zone, which on April 15th it acted as a good resistance area.
Alternatively, a drop back below the aforementioned upside support line and the 1.3020 hurdle, could temporarily spook the buyers from the arena. But in order to turn bearish again, we would like to see a break below, not only the previously-mentioned downside line, but also the 1.2960 mark, which is the high of April 24th. This way, we could examine the 1.2905 obstacle, as the next potential support area. But if the selling is still strong at that time, a break of it could open the door to the 1.2865 level, marked by the lowest point of April.
Overall, USD/CAD is still trading above its medium-term upside support line taken from the low of January 31st. Last week, the pair had a good run to the upside, breaking above a short-term tentative downside resistance line, drawn from the highest point of March. But yesterday, the rate got hit and depreciated heavily, bringing USD/CAD back below the above-mentioned downside line and also the key support (now will be seen as resistance), at 1.3405. For now, even though we could see a bit of retracement to the upside, in our opinion, the short-term outlook has turned slightly to the negative side, hence why we will target some lower areas.
A drop below the 1.3377 hurdle, which recently held the rate from moving lower, could open the door to further declines. The pair would also be placed below its 200 EMA on the 4-hour chart, which could just attract more sellers into the game and push USD/CAD to the strong support zone between the 1.3335 and 1.3345 levels. The rate could stall around there, or even bounce back up a bit. But if the bulls are still on the weaker side, the bears might take advantage of the higher rate and push the pair lower, potentially bypassing the above-mentioned support zone and aiming for the 1.3300 hurdle. It acted as a good area of support throughout April.
On the other hand, if USD/CAD suddenly reverses and travels back above the 1.3405 area and breaks above the previously-discussed downside resistance line, this might spook the bears from the field. But in order to get slightly more comfortable with the upside, we would like to wait for a break above the 1.3440 barrier, marked by the low of April 29th. This way, the pair could clear the path for itself towards the 1.3480 obstacle, a break of which may lift the rate even higher. The next possible target for USD/CAD could be the 1.3517 level, marked by the high of April 25th.
During the European session, the UK manufacturing PMI for April is coming out and the forecast suggests a retreat to 53.5 from 55.1. On Thursday, we get the construction PMI for the month, which is expected to have fractionally returned back within the expansionary territory (50.3 from 49.7), and then, on Friday, the services index is due to be released. Expectations are for this index to have also rebounded back above 50. Specifically, the forecast is for a rebound to 50.2 from 48.9.
Under normal circumstances, the market tends to pay more attention to the services print, given that the sector accounts for around 80% of the UK GDP. However, with GBP-traders’ gaze locked on the Brexit landscape, market data have taken the back seat recently. Even after the EU granted another extension to Article 50, which could last until October 31st, the pound’s reaction to economic data continued to be muted. Barring any major deviations to the forecasts, this could be the case this week as well. Pound traders may prefer to pay more attention to the BoE meeting, as they scratch their heads to figure out what the Bank’s plans are now, after the extension allowance.
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