End of May is just around the corner and the Forex market prepares for three big events ahead: the NFP (Non-Farm Payrolls) in the United States this Friday, the ECB (European Central Bank) interest rate decision next week and the all-important Fed June meeting in the middle of next month.
Let’s take these events one by one and see what we can make out of each other. The NFP this Friday is supposed to act as a bellwether for the June Fed’s decision. However, I would say it won’t matter.
The reason for this is that the jobs data in the United States is already tight enough, that even a miss this Friday won’t change the Fed’s path. My take is that the Fed will hike this June, with or without the NFP confirming the solid US economy.
The US GDP (Gross Domestic Product – shows the total value of goods and services in an economy) was revised higher and this tells much about how the US economy is doing. Moreover, the Fed might be behind the curve if the Trump’s administration will move on with their tax cut plans. From this point of view, the risk is that the Fed will deliver a rate hike this coming June.
The ECB, on the other hand, is in a terrible spot: inflation is not sustainable, but growth came to Eurozone economies. Only today, the German CPI (Consumer Price Index – inflation) showed yet another decline, but the French GDP printed better than expectations.
It leads to the ECB being forced to signal a bit of a hawkish message next week and Euro traders should see the EURUSD pair extending gains above 1.13. After that, it all comes to Fed’s decision to hike or not the interest rates.
The Fed looks at the June’s meeting at the possible date for another rate hike. With it, the interest rate differential between the major central banks in the world will rise even further. To put this into perspective, imagine that the ECB and SNB in Switzerland, among other central banks, have their rates dip in negative territory.
This puts a fresh new perspective on where the Fed is (and the state of the US economy) and where other central banks in the world sit. The Fed seems to have clearly embarked in a tightening cycle (this would be the 3rd hike in the last six months), while other central banks still struggle.
To sum up, the dollar may suffer until the middle of June, but look for the Fed to be hawkish.