Talking points about the dollar, interest rates, and FOMC Discussion Points
The EURUSD hasn’t exactly been moving in a straight line during the previous four months, but with the release of the October nonfarm payrolls on November 4th, the bulls have mostly been in charge of the benchmark pair (NFPs). The market would eventually find itself stretched and more and more dependent on strong underlying impetus to maintain such a trend. But what we have witnessed over the past week has had the exact opposite effect. The European authority’s rate increase last week and vow to increase rates by at least another 50 basis points at the next meeting failed to cause an increase in either the Euro or European 2-year yields.
The US labor statistics and service sector activity from last Friday provided the Greenback with a long-overdue rally for relief. The push, however, was sufficient to cause the EURUSD to break out of its risk wedge of the previous three months and to drop further technical barriers in a longer-term 61.8 Fib retracement and old “pivot” area around 1.0770. The 50-day simple moving average (SMA) hasn’t been breached, though, as of Tuesday’s closing. Following a tumultuous day made more so by comments made by Fed Chairman Jerome Powell, we also witness erratic intraday movements that have created significant “wicks,” which technicians interpret as hesitation.
Fundamentally speaking, both a visual and statistical viewpoint clearly show how interest rates have an impact. However, the surge in US interest rate expectations over the last 72 hours of active trade has contributed significantly to the reversal of this exchange rate. Particularly, the implications of the more than 500,000 increase in national payrolls and the significant recovery in service sector activity—the main driver of US economic output—were what propelled the rise in yields and implied Fed Funds rates via futures. The estimated terminal Fed Funds rate through June futures increased from 4.88 to 5.10 percent in response, while the 2-year Treasury rate rose from around 4.10 percent to 4.47 percent. Both dovish and hawkish interpretations may be applied to Powell’s words from this session, but I believe it is important to note that the aforementioned rates leveled out some hours before he spoke. At the end, I think his comments are a little more hawkish than what he said in the presser last week, but US interest rates are unlikely to rise further until there is a significant improvement in inflation pressures, and we won’t know more until next Tuesday’s CPI.
One of the five Fed speakers slated to appear in the next 24 hours may be able to affect how the Fed is seen, but it would go against previous patterns. If predictions for US interest rates remain unchanged, a new fundamental driver must emerge to move the market in one direction or the other. We will probably need to take money from another source because the Euro docket is almost completely empty through the end of the week. Although headlines are always a possibility, they aren’t very trustworthy when charting probability, much less scenarios. The impact of broad “risk trends” is another factor that should be mentioned for EURUSD. The dollar’s status as a “safe haven” currency has just been restored, and while if the correlation with the most liquid currency in the world isn’t as strong as it is with some other crosses, it is still noticeable. The CME’s EVZ Euro volatility index should be followed more carefully, although if the equity-based VIX spikes, the EURUSD is likely to be more affected by the Dollar.