Week Ahead: Hawkish Fed, robust jobs report should fuel Dollar rebound

October 28, 2022

The US Federal Reserve (Fed) is widely expected to hike its benchmark rates by another 75 basis points (bps) yet again in the new month.

However, how high the US central bank can ultimately raise interest rates would depend on the state of the economy, of which the jobs data is a key indicator.

The upcoming Fed policy meeting, along with the latest US nonfarm payrolls report, will be of utmost importance in the week ahead, also featuring these scheduled data releases and events

Monday, October 31

JPY: Japan September industrial production, retail sales, October consumer confidence
AUD: Australia September retail sales, October inflation
CNH: China October PMIs
EUR: Eurozone 3Q GDP and October inflation, ECB Chief Economist Philip Lane speech, Germany September retail sales
Brent: OPEC releases 2022 World Oil Outlook

Tuesday, November 1

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AUD: Reserve Bank of Australia policy decision
CNH: China October Caixin manufacturing PMI
GBP: UK October manufacturing PMI (final)
CAD: Canada October manufacturing PMI (final)
USD: US October manufacturing PMI (final), ISM manufacturing

Wednesday, November 2

NZD: New Zealand 3Q unemployment rate
JPY: Bank of Japan September meeting minutes
EUR: Eurozone October manufacturing PMI (final); Germany September external trade and October unemployment
USD: FOMC rate decision
US crude: EIA weekly oil inventory report

Thursday, November 3

AUD: Australia September external trade, October PMIs (final)
CNH: China October composite and services PMIs
EUR: Eurozone September unemployment, ECB President Christine Lagarde speech
GBP: Bank of England rate decision
USD: US weekly initial jobless claims, October ISM services index

Friday, November 4

EUR: Eurozone September PPI, Germany September factory orders, ECB President Christine Lagarde speech
USD: US October nonfarm payrolls, Boston Fed President Susan Collins speech
CAD: Canada October unemployment rate

With next week’s hike already well-telegraphed, markets are already honing their attentions to what Fed Chair Jerome Powell might say during Wednesday’s press conference about potential policy adjustments to be made at the Fed’s December meetings and beyond.

Assuming we indeed see yet another 75bps hike next week, that would bring the upper bound of the Fed benchmark rates up to 3.75%.

Markets currently believe that such a move (75bps hike next week) would put the largest chunks of the Fed rate hikes behind us.
At present, markets also expect that US interest rates would peak around 4.8% in Q2 2023.
That suggests just another couple of relatively smaller 50bps hikes left in the Fed’s pipeline before this rate-hiking cycle is over (again, assuming that a 75bps hike does indeed materialize next week).

The above essentially comprises the “dovish pivot” narrative that traders and investors have been testing at various intervals since the summer.

This latest iteration of that “dovish pivot” narrative has prompted a softening of the US dollar, with the equally-weighted USD index falling away from its post-pandemic high and bounce off its 50-day simple moving average (SMA) as key support.

Ultimately, how high US interest rates would go could ultimately depend on the incoming economic data.

And the incoming US nonfarm payrolls (NFP) report is expected to remind investors of the resilience evident in the jobs market of the world’s largest economy, potentially paving the way for more Fed rate hikes.

Here’s what economists are predicting for the upcoming US jobs report:

Headline NFP figure: 200,000 jobs added in October; lower than September’s 263k.
Unemployment rate: a slight uptick to 3.6% compared to the 3.5% in the month prior.

A lower-than-expected headline NFP figure, or a higher-than-expected unemployment rate, could bolster the “dovish pivot” narrative.

That should, in turn, prompt the USD Index to unwind more of its year-to-date gains and retest the early-September peak around 1.22 for support, with stronger support set to follow around its 100-day SMA at 1.21.

However, if hiring in the US economy comes in better than expected, being able to withstand the Fed rate hikes that have been ongoing since March, that could restore this USD Index back on a path back closer to its mid-October high above 1.29 as the “dovish pivot” proponents are forced to forego their expectations for a while longer.

And of course, much of the USD Index’s performance in the coming week should rely heavily on the latest policy clues due out of the FOMC policy statement and Fed Chair Jerome Powell’s press conference.

If the Fed signals that it remains hell bent on squashing red-hot US inflation by sending US interest rates past the market-forecasted 4.7% peak, such hawkish policy clues should reinvigorate dollar bulls.

While this Week Ahead article has been rather US-centric, also note that the Bank of England is in action at the onset of November. With central banks on either side of the pond in action in the coming week, that sets up some potential volatility for GBPUSD.

So be sure to check back in on Monday when we publish our regular Trade of the Week article.

Article by ForexTime