Pivotal Week

It will be a big week for traders with crucial central bank meetings in the U.S. and U.K. on tab as well as the U.S. Nonfarm payrolls report at the end of this pivotal week.

The market’s expectations of the FOMC decision on Wednesday are clear. Fed policy makers are expected to decide to scale back their massive bond-purchase program while this expectation is fully priced in into the U.S. dollar’s steadiness. When it comes to interest rate hikes, Fed Chair Jerome Powell told a virtual panel discussion on Oct. 22 that policy makers “can be patient” and “allow the labor market to heal”. Powell expects that jobs growth moves back up closer to the high levels seen last summer.

A first test of Powell’s expectations will come on Friday with the October jobs numbers due for release. Economists forecast that payrolls show a bigger jobs gain than the report in September but numbers are expected to be below the 1.03 million monthly average in June and July.

The crux

It is a very tricky job for monetary policy makers since the labor market has changed following the Covid-19 shock. Many jobs are not going to come back while millions of Americans were prompted to permanently leave the workforce or have retired early because of the crisis. The changes to the jobs market could thus be more lasting than Powell apparently believes, making it difficult to return to pre-pandemic levels without spurring inflation.

The hawkish surprise

Most attention will be paid to the Bank of England interest rate decision on Thursday. The expectation is that the BoE will deliver a 15bps rate rise given the heightened concerns over inflation. If BoE policy makers however choose not to raise rates, the pound will experience its most negative scenario with potential price dips. In the GBP/USD we currently see a potential trading range between 1.40 and 1.3330 and prepare for high volatility in the coming days.

EUR/USD

Last week, the euro was temporally boosted by the ECB’s reluctance to push back against market rate hike bets but the single currency has returned to its support levels and ended last week lower. If the euro falls below 1.1520 and further 1.15, we will shift our focus to a lower target at 1.1450. Falling below 1.14 could spur a bearish follow-through until 1.12. For bullish momentum to accelerate we would need to see a renewed break above 1.16 and 1.1630.

Conclusion

The market is pricing in two Fed rate hike by the end of 2022. Any shift away from these hawkish expectations will hurt the dollar. If Powell acknowledges however upside risks to inflation at the Fed press conference, the dollar could further strengthen.

The BoE will be tightening nonetheless, regardless of whether policy makers decide to raise rates this Thursday or months later. This expectation could buoy the pound in the medium-term.

 

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