Aside from the Bank of Japan (BoJ) surprising the market on Friday by announcing another round of stimulus, the major talking point last week was the US Federal Reserve finally concluding the QE program. These two announcements, alongside better than expected US GDP data, strengthened demand for the US Dollar, but for somewhat different reasons.
The Fed concluding QE is widely seen as a vital indication that the US is moving towards normalizing monetary policy, which is also providing confidence in the global economic recovery. Alongside improved US GDP, the Fed is now facing increasing pressure to raise interest rates sooner than expected, however this still seems to be premature optimism. While the US economic outlook has improved dramatically over recent months, the Fed continues to maintain that rates will be left unchanged for a “considerable time”. There is a high quantity of US economic data announcements this week and movement in the currency markets can be expected as a result.
It remains no secret that the majority of the US economic momentum over recent months has been encouraged by the improved employment outlook, but there signs remain that some other aspects of the US economy are performing slightly inconsistently. For example, the USD was widely sold-off following the latest Durable Goods Orders unexpectedly declining for the second successive month.
The expectations for a 56.2 Manufacturing ISM this afternoon are quite high, so a possible figure below this being announced this afternoon shouldn’t necessarily be met with widespread disappointment. However, with manufacturing remaining both a US GDP contributor and a key employment sector – a slight slowdown in sector growth would provide the Fed with a reason to delay discussions on raising rates.
Also on Monday, construction spending is expected to be announced at 0.7%. The US construction sector remains one of the industries that is still performing below pre-recession levels and more progress is also needed to be seen in such sectors (construction, housing) before the Federal Reserve are likely to elevate discussions regarding the next step towards normalizing monetary policy.
On Tuesday, attention will be placed on the latest Factory Orders release, with a decline of -0.6% expected for September. Following the Durable Goods misfire last week, investors might not react positively to a Factor Orders decline. There is some concern among analysts that the major explanation for better than expected Q2 and Q3 GDP releases was because of a surge in business inventory levels, and not consumer expenditure. If the improved GDP data was being linked to impressive advance retail sales performances (consumer expenditure is 70% of US economy), then there would be stronger pressure on the Federal Reserve to begin monetary tightening.
Before US Initial Jobless Claims and Non-Farm Payrolls data releases conclude the week, attention will be drawn towards Wednesday’s ISM Non-Manufacturing Composite. Progress in the manufacturing sector has been noticed as of late, and this release will allow investors to see the progress made in October by other sectors.
In reference to the employment reports, more progress is expected to have been made as we enter November. Now that the US unemployment rate has dropped and hopefully stays below 5.9%, we can expect more pressure to be applied on average wage growth figures. Average wage growth remaining low would provide another reason for the Fed to maintain record-low interest rates for a “considerable time”.
Overall, although US initial Jobless claims averaging near a 15-year low and the US adding 200,000 jobs to its economy for six months for the first time since 1997 are outstanding achievements, we are still some way from the Federal Reserve tightening policy. Now that QE is over, pressure will be on data to show that it can withstand no QE. If US economic data does slowdown in the upcoming weeks, traders should still be mindful towards investors taking profit and closing their positions.
In the event that investors do close positions on the Dollar, there might be opportunities to watch out for in the USDJPY and Gold. Gold is finally extending below that crucial $1180 support level and is rightly being seen as a crucial indicator that the bears are in control. However, this could still be a false break-out and, if US economic data does disappoint, Gold might still attempt a return to $1180. At the same time, although the improved US economic outlook has helped the USDJPY progress, the major contributor behind the USDJPY sudden 400 pips appreciation was due to the surprising announcement from the BoJ that it has unexpectedly increased financial stimulus.
This has severely weakened the JPY, but we will not be provided with any clarity as to why the BoJ took this decision until Governor Kuroda speaks on Wednesday morning. Until then, volatility is expected to continue with the JPY. In the meantime, both the Stochastic Oscillator and RSI appear heavily overbought. A potential slowdown in US economic data might still provide the opportunity for the USDJPY to find support around 113.000 or 112.691.
Published On Mon, Nov 3 2014, 12:05 GMT