If you are looking for some market action, then keep a close eye on the dollar.
The currency could turn volatile over the next few days thanks to the Federal Reserve meeting and highly anticipated US jobs report. Before we discuss what to expect from these two key risk events and potential market shakers, it is worth keeping in mind that the dollar entered November on a shaky note.
Bulls we missing in action on Monday despite the Dollar Index (DXY) posting its biggest daily rise in more than four months last Friday following the strong inflation numbers.
So far, the final quarter of 2021 has not been kind to the dollar due to the improving risk appetite and mixed US economic data. However, it is still early days with events of this week heavily influencing the dollars outlook.
Why November’s Fed meeting is a big deal
The Fed is expected to keep interest rates unchanged at the end of its two-day FOMC meeting. However, investors will be more concerned with the magic “T” word and the official announcement to get the ball rolling by either mid-November or mid-December. After talking about, talking about tapering for many months, this meeting will mark a crucial turning point for the Fed as it steps away from easy policy.
Investors will be paying very close attention to any key details on the pace and composition of the taper. Markets widely expect the central bank to announce it will reduce its bond purchases by $15 billion every month with the taper to be completed by June 2022.
Other key things to watch out for will be the central bank’s thoughts on rising inflation. Last Friday, the core PCE price index, which is the Fed’s preferred inflation measure held steady at 3.6% while US consumer prices remain at a 13 year high. Should Powell express concerns about price rises becoming sustained, this could fuel speculation over the Fed acting aggressively to tame inflation. Another thing to keep in mind is that the Fed has repeatedly emphasized that tapering does not indicate interest rates would rise immediately. Interestingly, markets currently see a 74.4% probability of at least one rate hike by mid-June 2022 as of writing.
A hawkish sounding Federal Reserve could inject dollar bulls with renewed confidence ahead of the US jobs report on Friday.
What to expect from Friday’s NFP
All eyes will be on the US nonfarm payrolls report for October which could show some improvement in hiring thanks to falling new cases of Covid-19.
According to Bloomberg estimates, 450k jobs are expected to have been created in October compared to the 194k witnessed in the previous month. The unemployment rate is expected to tick lower to 4.7% from 4.8% while average hourly earnings is seen jumping 4.9% year-over-year compared to 4.6% in September. A report that meets or exceeds expectations is likely to support the dollar and fuel rate hike expectations. Alternatively, a disappointing report could see the dollar weaken.
USD Index breakout on the horizon?
The equally-weighted USD Index remains under pressure on the daily charts as there have been consistently lower lows and lower highs.
But prices seem to be trapped within a range with support at 1.0730 and resistance at 1.0810. A solid breakdown below 1.0730 could open the doors towards 1.0670 and 1.0600, respectively. Alternatively, a strong breakout above 1.0810 may open the doors towards 1.0880 and 1.0930.
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