USD strength still seems the most likely direction in most scenarios at the moment. “Risk off” would still tend to favour the USD as the big concerns relate to the euro area. “Risk on” still seems most likely to come from better US data, and consequently looks likely to lead to a rise in US yields relative to the euro area, though at this stage this effect is comparatively modest. The employment report has left the market with a slightly risk negative tone, which doesn’t seem entirely justified by the data. But the risks of a big move still seem to be towards a stronger USD, most likely in a risk negative scenario, even though positioning is still starting from a long USD bias.
Fundamental event risks drops significantly in the days ahead, but volatility may remain elevated all the same. Any especially large surprises in Friday’s US Consumer Price Index inflation figures could drive important US Dollar moves. Yet this past week showed that traders were more than willing to force big EURUSD moves even in the absence of event risk. Just this week we saw a surprisingly hawkish US Federal Reserve send the US Dollar sharply higher, but a disappointing Nonfarm Payrolls result brought the currency back to Earth. Ultimately, do either events represent a true “game-changing” piece of news? Not in this author’s opinion.
The Federal Open Market Committee (FOMC) Minutes from March’s rate decision showed no strong mention of further monetary policy easing, and traders immediately sent US yields and the domestic currency higher. Yet FOMC rhetoric is one matter and what voting members will ultimately decide is another. In other words: the FOMC minutes represent the opinion of a broad range of Regional Fed presidents and other officials. The voting committee is a much smaller group, and on the whole the voting members seem more dovish than the majority.
Markets clearly remain quite sensitive to economic data surprises, but we’re not convinced that the next big US Dollar move will come on any one data release. Instead DailyFX wait patiently for a test of significant 8-month highs
The US job report disappointed badly in March by only showing 120k in job gains versus consensus of 205k and job gains in the previous three months of 246k on average. However, the job report is probably painting too weak a picture as most other labour market indicators point to continued robust job growth. Seasonal distortions are probably playing a role on top of the normal volatility in the data. The negative effect from seasonal distortions will continue in April before abating again. Hence we could have another weak job report in store next month. The apparent softness in the US labour market will raise concerns over the strength of the US recovery and keep the door open for further stimulus from the Fed. But as we get through the seasonal distortions after April, Danske believe a stronger picture of job growth will emerge again and that the Fed will refrain from more easing.
The NFIB small business optimism survey for the month of March is due out for release Tuesday. A measure of US small business confidence, the series has shown seven consecutive months of improvement.
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