Week Ahead: US dollar in focus ahead of FOMC, NFP

For more than a week, the US dollar has risen sharply as US government bond yields have surged – with the benchmark 10-year Treasury yield briefly topping 3% – while geopolitical risk perceptions have tentatively waned. As the dollar broke out on higher interest rate expectations, lofty bond yields also weighed on equity markets, pressuring major stock indexes despite what has generally turned out to be a very positive earnings season thus far. Many major index components, most notably in the financial and technology sectors, delivered results significantly better than consensus expectations, and some dramatically better. Still, however, stocks struggled to gain footing amid the looming specter of potentially higher inflation and interest rates.

The US dollar has been boosted not only by rising bond yields and rate expectations, but also by its relatively lagging counterparts, most notably the euro, pound, and yen. On Thursday, the European Central Bank kept interest rates unchanged as widely expected but also delivered comments that were considered more dovish than expected by euro traders, placing additional pressure on the shared currency. The Japanese yen has been in a consistent state of free-fall for much of the past month as the widening differential between Federal Reserve and Bank of Japan monetary policy expectations has become increasingly clear. On Friday, the BoJ kept policy unchanged as widely expected, which did little to provide respite for the struggling yen. Also on Friday, the UK quarterly GDP estimate came out significantly lower than expected while the US quarterly GDP estimate was significantly higher than expected. This divergence helped prompt a substantial plunge for GBP/USD, extending its tumble of the past two weeks.

With the euro, pound, and yen all struggling against a resurgent dollar, the week ahead will be especially critical for determining whether the greenback extends its gains or not. Aside from the continuing focus on rising government bond yields, two major events will dominate the week’s schedule. First up will be Wednesday’s FOMC decision. Though the Fed is not expected to raise interest rates this time around after the last rate hike in March, expectations have been rising that the central bank may likely be on track to deliver four rate hikes this year instead of the three that were targeted in the March meeting. If such a likelihood is acknowledged or telegraphed in any way on Wednesday, the dollar could be boosted significantly further. The other critical event in the week ahead will be the US jobs report on Friday, which will be anchored both by the headline non-farm payrolls report as well as by key wage growth figures, which are closely watched indicators of inflation. Current consensus expectations are pointing to around 185,000 jobs added to the US economy in April after March’s disappointing 103,000 print, and a +0.2% rise in average hourly earnings after March’s in-line +0.3% reading. If both key aspects of the employment report are higher or at least in-line with expectations, the dollar may likely extend its rally. Any major disappointments, in contrast, could result in a pullback for the dollar.

Aside from the FOMC decision and US jobs report, the very busy week ahead will also feature other key releases. On Monday, the US Core PCE Price Index, which is seen as the Fed’s favorite inflation indicator, will be released for March, and is expected to hold steady at +0.2%. Tuesday will feature the Reserve Bank of Australia’s rate decision and statement, UK manufacturing PMI, Canadian GDP, and US manufacturing PMI. On Wednesday, aside from the FOMC decision in the afternoon, New Zealand jobs data, UK construction PMI, and the ADP US private employment report will also be released. Thursday will include Australian and Canadian trade balance data as well as UK and US services PMI readings. Finally, Friday will bring not only the highly anticipated US jobs report, but also the Reserve Bank of Australia’s monetary policy statement.