Key levels EUR/USD, USD/JPY towards ISM, employment, FOMC

The importance of today’s FOMC meeting continued to grow, as US economic data. And with that, expectations of any rate cuts this year have been crushed, which is impressive when you consider that markets were pricing in five or more cuts just three months ago.

If we take a look at the implied yield on the December 2024 Fed funds futures contract, it has moved from a January low of 3.75% to 5.1% yesterday. Which means that market prices have effectively erased 5.4 hypothetical 25bp cuts. And as my colleague David Scutt tweeted earlier, “The Fed funds curve now has less than one rate hike this year.”

Personally, I’ve never been on board with the price hike crowd and thought two cuts was more realistic. But even that was starting to look tight assuming the Fed doesn’t want to cut to close the election. However, we are now in May, inflation, wages, labor costs are higher and employment is holding steady, I’m having trouble seeing a single cut and now I think talk of a raise might not be so crazy. The question is whether they would be inclined to drop such suggestions today.

My base case is that the Fed will recognize a strong economy and pour cold water on that final cut of the markets trying to price it. this year. But the thought must have crossed their minds.

However, if Powell plays into the hands of the doves and keeps the door open for a cut, it could boost sentiment for stocks, FX commodities and weigh on the US dollar.

Economic events (GMT+1)

The US data USA they will be closely watched ahead of the Fed meeting, with the hope that they will soften and allow Powell to keep the door open for a cut. According to some estimates, the Flash manufacturing PMI is expected to contract for the first time this year, which could have some more weight if supported by a softer ISM report and both lower “prices paid” indexes. And a surprisingly weak ADP jobs report could also help. But I’m not holding my breath, as US data is generally surprising to the upside and the Citi FX surprise inflation index is hovering around an 18-month high.

• 13:15 – US ADP non-farm payrolls report
• 13:15 – Canada’s manufacturing PMI, BOC Macklem speaks
• 14:45 – US final manufacturing PMI (S&P Global)
• 15:00 – US ISM Manufacturing U.S., JOLT job offers, construction expenses
• 19:00 – Fed interest rate decision, FOMC statement
• 19:30 – FOMC press conference

EUR/USD Technical Analysis:

The daily chart on the left shows that Tuesday formed a prominent bearish outside day, to regain momentum in line with the downtrend. He had warned on Monday about the potential for strength in the US dollar and the bulls clearly delivered. From here I suspect it will retest the April low and break below it, given the divergent policies between the Fed and the ECB, of which the Fed already has the higher interest rate. The question now is how it can get there.

Clearly today’s Fed meeting is a risk event so both bullish and bearish outcomes should be considered. If the Fed meeting does little to change its tune, then there are risks of a pullback in the USD (EUR/USD bullish) on the assumption that the greenback may reverse some of Tuesday’s preemptive bets of a more hawkish Fed. If so, I’d rather look for evidence of a high swing, several of which appear below the 1.07 handle.

USD/JPY Technical Analysis:

We saw USD/JPY move towards 158 as expected, although we didn’t get the pullback to 156/o on Monday as expected. For now, it looks like price action is simply filling the liquidity gap left when the BOJ intervened around 159.59.

The resistance group around 158 could provide a pivot; a break above could see prices accelerate towards 159 as prices attempt to cover the remainder of the intervention liquidity gap. However, I am not convinced that USD/JPY will simply break above 160 given the +400 pip decline that occurred the last time that level was tested. Therefore, bears could look for evidence of a top move around 158 for an early pullback in the US dollar, or wait to see if it forms up to the 159 handle on the assumption that USD/JPY will not yet dare to head to 160. 157, 156.30 and 155.50 downside targets of the area currently in focus.

See the full economic calendar

— Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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