Forex Weekly Outlook May 7-11 – Did the dollar reach its peak?

The US Dollar enjoyed another week of significant gains, at times defying news that could have turned it around. Can it continue rising or will it correct to the downside? The inflation report stands in a week that also features two rate decisions. Here are the highlights for the upcoming week.

The US Non-Farm Payrolls disappointed with a gain of only 164K and a slowdown in wages: 2.6% YoY and 0.1% MoM. The greenback initially struggled but recovered quickly. There were some silver linings in the report but the comeback may be more related to the notion that this will not stop the Fed from raising rates in June. It also followed the reaction to the Fed’s May decision. As expected, Powell and his colleagues left rates unchanged but changed their characterization of the inflation target and called it symmetric. Markets understood that as a hint that the Fed may tolerate higher inflation and the dollar dropped at first before rising. The greenback had an easier path against the euro, with a confirmation of the economic moderation in Q1, 0.4% growth, and lower inflation, with Core CPI falling to 0.7% y/y. The dollar also made considerable gains against the pound, which suffered mostly disappointing PMI data as well as concerns about a more hardline stance of the British government following the resignation of Home Secretary Rudd.

1. Jerome Powell talks Tuesday, 7:!5. Fed Chair Jerome Powell delivers a speech titled “Monetary Policy Influences on Global Financial Conditions and International Capital Flows” in Zurich. While he is out of the US and speaking about global conditions, talking about monetary policy may yield market-moving comments, especially if he talks about inflation. Markets will also be watching for any hint about the expected June hike.
2. US PPI: Wednesday, 12:30. The Producer Price Index provides insights about consumer inflation in the pipeline. Back in March, both headline PPI and Core PPI rose at a solid rate of 0.3%. The report for April is projected to show a slower pace of price rises: 0.2% in both measures.
3. New Zealand rate decision: Wednesday, 21:00. The Reserve Bank of New Zealand is expected to leave the interest rate unchanged at 1.75% once again. However, the relatively new RBNZ Governor Adrian Orr will have the opportunity to shape expectations in the accompanying statement, the press conference at 22:00 and the following testimony at 1:10. The recent jobs report provides the central bank with reasons to be cheerful as the unemployment rate remains low. The recent fall of the New Zealand Dollar may also prove a boon for the economy. Will we hear an optimistic message? There still is a lot of uncertainty about the direction of the central bank and NZD/USD could go both ways.
4. UK rate decision: Thursday, 11:00. This is one of the Bank of England’s “Super Thursday” events as in addition to the rate decision and the MPC Meeting Minutes, the BOE also publishes its all-important Quarterly Inflation Report. Until a few weeks ago, the BOE was expected to raise rates in this May decision. The BOE laid down thick hints it was coming. Yet recent data have been very disappointing: GDP grew by only 0.1% q/q in Q1, PMI figures point to an upcoming slowdown and Governor Mark Carney hinted that rates are not coming so soon. This accumulation of events resulted in expectations that the BOE leaves rates unchanged at 0.50% at this occasion. The focus will be on the forecasts for inflation (that also slowed down to 2.5%) and the messages about raising rates in the remainder of the year. If Carney and co. convey a message that the situation has worsened and that no hike is expected this year, the pound could extend its plunge. If they see the recent slowdown as temporary, like Draghi did when referring to the euro-zone, Sterling could recover.
5. US inflation: Thursday, 12:30. Core inflation finally jumped above 2% in March. It advanced to 2.1% y/y after stubbornly sticking to 1.8% for a long time. This time, a renewed drop to 1.9% is expected. A deterioration to 1.8% could lower expectations for rate hikes and could send the dollar down. Holding onto 2% would be good news for the greenback. On a monthly basis, Core CPI by 0.2% as in March. Headline CPI carries expectations for an increase of 0.3% after dropping in the previous month.
6. Canadian jobs report Friday, 12:30. Canada publishes its April jobs report one week after the US, giving it the full stage. The Canadian labor market enjoyed a robust rise in jobs back in March: 32.2K. This time, a more moderate increase is on the cards: 19.5K, closer to regular averages. The BOC is expecting a return to normal levels of growth after a weak first quarter. The unemployment rate is projected to remain unchanged at 5.8%.
7. Mario Draghi speaks Friday, 13:15. The President of the European Central Bank will be speaking in Florence, Italy, his home country. In his last press conference in late April, Draghi recently described the Q1 slowdown as a moderation that is due to temporary factors. Since making that speech we learned that growth was indeed weaker and also inflation decelerated. Will he express more concern about the situation or does he still see it as temporary? Any reference to the economy and inflation will be watched closely and set to move markets.
8. US consumer sentiment: Friday, 14:00. The University of Michigan’s preliminary Consumer Sentiment Index is set to show a score of 98.4 points in May, very similar to the 98.8 figure which was the final read for April. Higher consumer sentiment implies increased spending, but the correlation is not always there.

*All times are GMT

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Further reading:

• EUR/USD forecast – for everything related to the euro.
• GBP/USD forecast – Pound/dollar analysis
• USD/JPY forecast – the outlook for dollar/yen
• AUD/USD forecast – projections for the Aussie dollar.
• USD/CAD forecast – Canadian dollar predictions

Safe trading!