As usual with the first week of every month, the FX calendar was packed with top tier events, including the monthly U.S. jobs updates, and the markets reacted accordingly.
Our strategists focused largely on very short-term setups, with a mixed outcome that likely required more active management in real time.
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USD/JPY 1-hour Forex Chart by TradingView
On Tuesday, the big event of the session was the fast approaching ISM U.S. Services PMI update, an important leading indicator of U.S. economic health.
Analysts were predicting that the headline reading may reflect a slower pace of industry growth, with the employment component likely to steal the show, as this would likely influence expectations for the official jobs report and therefore dollar direction. Overall, there were odds of Greenback drawing in net selling if early jobs metrics came in weaker than expected
We paired this potential outcome and Dollar volatility against the Japanese yen. We thought that the yen potential to draw in net buying after Tokyo core CPI signaled a return to acceleration for inflationary pressures, as the reading picked up from 1.6% y/y to 2.5% as expected.
With those fundie arguments and the assumption that they played out, we discussed potential scenario where USD/JPY couldn’t break range resistance and could move lower, potentially to the S2 Pivot Point support area.
Well, USD/JPY bears overachieved this week as U.S. data was disappointing overall and it seems that bullish yen speculation grew on the idea that the Bank of Japan may end negative interest rates this year. U.S. dollar bearishness grew more than expected as well with each job metric signaling possibly peak employment conditions may be developing (supporting rate cut speculation).
USD/JPY not only dropped to the discussed S2 Pivot support level, but hit the S4 support area on Friday with one last push from the arguably net weak U.S. government employment situation update.
Overall, given that our fundamental and technical outlooks played out and the resulting move was strongly in favor of our analysis outcome, we think that this discussion was highly likely to have been supportive of a net positive outcome, and likely without need for complex risk/trade management planning and execution.
On Wednesday we turned our focus to the upcoming ADP non-farm employment change and Fed Chair Powell to potentially move the Greenback and possible opportunities.
We paired that with the euro, which we thought could have a bearish lean leading up to the highly anticipated European Central Bank statement on Thursday.
Our main focus was on USD price action, so we discussed both a potential bullish Dollar reaction if job metrics came in better than expected and Powell stayed hawkish on interest rates, as well as a bearish one if U.S. jobs data disappointed.
EUR/USD actually broke above the top of the tight consolidation range ahead of the ADP data, likely continued reaction to disappointing ISM services data. And with ADP coming in below expectations, USD selling picked up momentum, taking EUR/USD to the targeted R2 Pivot resistance area discussed earlier.
Overall, we think that discussion was neutral-to-effective towards a positive outcome as the expected reaction to weaker-than-expected ADP scenario did play out, but the move to the target area was limited given that the pair already broke above the consolidation.
For those who played this discussion beyond Wednesday’s target catalyst, there was an opportunity to catch further USD weakness, as long as the risk and trade management plan/execution accounted for the high volatility that the ECB monetary policy statement and U.S. jobs update was likely to bring.
The euro was set to move on Thursday with high odds of the upcoming European Central Bank’s monetary policy statement to get traders moving on the common currency.
Market expectations were that the ECB will keep rates on hold, but the big question was whether or not there would be signs of cutting rates sometime soon like the first half of 2024. there are strong arguments for the central bank to turn a bit more dovish this time.
Recent data was pretty balanced for the argument, but there was arguably slight lean favoring a potential cut by June, and/or the ECB revising their outlook for economic growth and inflation lower. At the very least, this may push the ECB to close to door on further rate hikes.
With that set of potential event scenarios, we chose to lean towards a potential move lower in the euro and pair that with the Loonie, due to recent bullish CAD sentiment thanks to the previous day’s Bank of Canada monetary policy statement. During their monetary policy statement on Wednesday, BOC policymakers mentioned that upside risks to inflation still remain and that it’s too early for rate cut talk.
We also discussed how waiting for the actual event release before making plans and executing was likely the best practice, especially considering that there’s a chance of increased volatility and/or market reversal.
As expected, the European Central Bank made no changes to their interest rates in their statement, and downgraded their outlook on economic growth and inflation, immediately triggering a selloff in the euro.
But the tone changed on the euro during the ECB press conference as ECB President Lagarde’s rhetoric shifted traders’ expectations quickly. She basically said that while the ECB is making progress, but they are not sufficiently confident and will need more evidence to confirm inflation rates will stay at lower levels before cutting.
She hinted that this data may come in June, instantly pushing broad market speculation from May to June for the first rate cut. EUR/CAD popped higher on those comments, but it was a limited move as technical bears stepped in as the market tested the broken rising trend line, and likely on bullish CAD traders picking up some Loonie at better prices.
Overall, we’d rate this discussion as unlikely-to-neutral towards supporting a positive outcome. Our expectations of an ECB hold and potentially dovish move played out on the monetary policy statement release, as well as our warning of increased volatility/reversal during the ECB press conference did play out as well.
But with that choppiness, a positive outcome would likely have only been achieved from those watching and assessing the event real time, and able to actively plan and manage the position as Lagarde spoke.
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