US: Data in the coming day’s key for short-term USD direction - MUFG

Derek Halpenny, European Head of GMR at MUFG, suggests that they are a little surprised to see EUR/USD still holding on to the ECB tapering bounce from yesterday and of course, market participants are naturally wary of dollar gains fuelled by better economic data and Fed rate hike speculation given the number of times the FOMC has balked from hiking.

Key Quotes

“But the next three days could be pivotal in terms of short-term direction. The 2-year UST bond yield is now at 0.82%, up 10bps from Friday and close to the August high ahead of the September FOMC. ADP and the non-manufacturing ISM report will be crucial today and then of course the NFP report on Friday. Remember, it was the plunge in the non-manufacturing ISM last month that convinced the market the FOMC would not hike in September and the dollar weakened sharply.

Given the rebound in other business sentiment readings and given the plunge last month made little sense, there is every reason to expect a rebound today. Assuming no surprise in the ADP employment data (there never really is) then expectations on a Fed rate hike will strengthen further. Of course a strong NFP then on Friday and we should not rule out the markets pondering a November rate hike. We still think it very unlikely, but rhetoric from Fed officials to date along with perhaps the FOMC incentivised by Donald Trump’s accusations in the first TV debate that FOMC policy decision-making is biased in favour of Hillary Clinton could encourage the Fed to act if the data warrants it. There is certainly a decent prospect of the markets considering it if the data this week were to justify it. That could give the dollar a big lift.”