Week Ahead in FX (October 31 – November 4): Fed Slowdown In Sight?

It’s the last day of the month and you know what that means – we’re starting a brand spankin’ new trading month tomorrow!

Traders might get a dramatic start to the month as they price in the RBA, BOE, and the FOMC’s latest policy decisions.

Oh, and did I mention that it’s also NFP week this week?

Before all that, ICYMI, I’ve written a quick recap of the market themes that pushed currency pairs around last week. Check it!

And now for the closely-watched potential market movers this week:

Major Economic Events:

RBA’s policy decision (Nov. 1, 3:30 AM GMT) – The Reserve Bank of Australia (RBA) surprised markets with a 25bps (vs. 50bps expected) rate hike in October. Members noted that they meet more often than its global peers anyway, and that they had raised rates aggressively enough in a short period of time.

Then, RBA Assistant Governor for Economics Luci Ellis recently hinted that RBA’s “neutral rate” is somewhere between 2.5% and 4.0%. So, while RBA has room to tighten, it probably won’t be as aggressive as in the previous months.

This is why markets only expect another 25bps increase to 2.85% from the central bank this week even though Australia’s inflation jumped to a 32-year high in Q3.

New Zealand’s quarterly labor data (Nov. 1, 9:45 pm GMT) – New Zealand’s unemployment rate surprisingly inched higher from 3.2% to 3.3% in Q2 but a jump in wage inflation pointed to more Reserve Bank of New Zealand (RBNZ) interest rate hikes.

Rate hike speculations didn’t only stall NZD’s intraweek downtrends at the time, it also propelled NZD to its intraweek highs!

Markets expect an improvement this week, with a 0.7% net job addition and the unemployment rate dipping back down to 3.2% in Q3. Meanwhile, the participation rate could’ve risen from 70.8% to 71.1%.

FOMC statement (Nov. 2, 6:00 pm GMT) – With Friday’s core PCE reading confirming a stubbornly high inflation, everyone and his momma is expecting the Fed to raise its interest rates by 75 basis points to the 3.75% – 4.00% range.

But that’s not where the drama will be. See, the new rates will come REALLY close to the 4.5% – 4.75% “terminal rate” that Fed members had penciled in for next year.

With not a lot of room for more 75bps rate hikes, the Fed will have to raise its rates by smaller increments but also keep markets from reading “slowdown” as “rate cuts to follow ASAP.”

Keep an eye on what the Fed thinks about inflation, the labor market, and its terminal rate for clues on how long Powell and his team are planning to keep their rates at high levels.

BOE’s policy decision (Nov. 3, 12:00 pm GMT) – Will the Bank of England (BOE) deliver another 75bps rate hike this week? Markets expect interest rates to rise from 2.25% to 3.00%. Recent speeches from BOE members point to it being a close fight though.

For one thing, PM Rishi Sunak moved the fiscal statement scheduled October 31 to November 17, suggesting that his government is planning tax hikes and austerity measures that will support BOE’s battle against inflation.

A surprise 50bps rate hike may weigh on GBP for a while but probably provide long-term support against its major counterparts.

NFP reports (Nov. 4, 12:30 pm GMT) – If you still feel like trading the dollar after the Fed event, then you’ll want to pay attention to this week’s U.S. non-farm payrolls (NFP) numbers.

The economy likely added a net of 200K jobs in October, which may be enough to push the unemployment rate from 3.5% to 3.6%. Average hourly earnings (0.3%) and participation rate (62.3%) are expected to hold last month’s readings.

The NFP release’s impact may be muted after the Fed has said its piece but if the “good news is bad news” theme holds for USD and risk assets, then signs of a strong labor market will likely fuel Fed rate hike speculations and push the dollar higher.

Canada’s jobs numbers (Nov. 4, 12:30 pm GMT) – Analysts see Canada adding a net of 5K jobs in October after the 21.1K addition in September. A lot more workers are expected to join the labor market, which could bump the jobless rate higher from 5.2% to 5.3%.

Unless we see surprises, then this week’s release won’t likely change the Bank of Canada’s (BOC) plans to slow down its interest rate hikes. If you recall, the BOC pulled an RBA and surprised markets with a 50bps rate hike when traders were prepared for a 75bps increase.

Forex Setup of the Week: USD/JPY

Traders have their eyes peeled for the Fed’s latest policy decision so you can bet that I’m watching the dollar this week!

It doesn’t hurt that the U.S. Dollar Index (DXY) is trading at a VERY interesting zone on the daily time frame.

DXY is trading just above the big 110.00, which is right around the 50% Fibonacci retracement of the upswing from mid-August to the end of September.

It’s not even the first time DXY is reacting to the 110.00 psychological handle. The zone was a key resistance in mid-July and the first half of September!

Any bullish momentum above 110.00 could lead to a continuation of USD’s uptrend. DXY could put more distance away from the 100 SMA and head for areas of interest like 112.00 or 114.00.

But that’s if USD gets enough buyers.

If this week’s headlines encourage a risk-friendly trading environment, then the safe-haven dollar could lose pips against its major counterparts.

DXY could extend its October losses and maybe break the 100 SMA support on the chart.

What do you think? Are we looking at a good pullback entry? Or the start of a downside breakout for the dollar?