It will be a big week for traders with crucial central bank meetings in the US and UK on the tab, as well as the US nonfarm payrolls report at the end of this pivotal week. The market's expectations of the FOMC decision on Wednesday are clear.
Fed policymakers are expected to decide to scale back their massive bond-purchase program while this expectation is reflected in the US dollar's steadiness.
Fed Chair Jerome Powell told a virtual panel discussion on Oct. 22 that policymakers "can be patient" and "allow the labor market to heal" regarding interest rate hikes. Powell expects that jobs growth will move back up closer to the high levels seen last summer.
The first test of Powell's expectations will come on Friday with the October jobs numbers. Economists forecast that payrolls show a more considerable job gain than the September report, but numbers are expected to be below the 1.03 million monthly average in June and July.
The Crux
It is tricky for monetary policymakers since the labor market has changed following the COVID-19 shock. Many jobs will not come back while millions of Americans were prompted to permanently leave the workforce or have retired early because of the crisis. The changes to the jobs market could thus be more lasting than Powell believes, making it difficult to return to pre-pandemic levels without spurring inflation.
The Hawkish Surprise
Markets will pay most attention to the Bank of England (BoE) interest rate decision on Thursday. The expectation is that the BoE will deliver a 15 bps rate rise, given the heightened concerns over inflation. However, if BoE policymakers choose not to raise rates, the pound will experience its most negative scenario with potential price dips.
In the GBP/USD, we see a possible trading range between 1.40 and 1.3330, and traders should prepare for high volatility in the coming days.
EUR/USD - Technical View
Last week, the EUR/USD pair was temporally boosted by the European Central Bank's (ECB) reluctance to push back against market rate hike bets, but the single currency has returned to its support levels and ended last week lower. If the euro falls below 1.1520 and further 1.15, we will shift our focus to a lower target at 1.1450. Falling below 1.14 could spur a bearish follow-through until 1.12. For bullish momentum to accelerate, we need to see renewed breaks above 1.16, 1.1630, and further 1.1660.
Conclusion
The market is pricing in two Fed rate hikes by the end of 2022. Any shift away from these hawkish expectations will hurt the dollar. However, if Powell acknowledges upside risks to inflation at the Fed press conference, the dollar could further strengthen.
The BoE will be tightening, regardless of whether policymakers decide to raise rates this Thursday or months later. This expectation could buoy the pound in the medium term.
Disclaimer: All trading ideas and expressions of opinion made in the articles are the personal opinion and assumptions of MaiMarFX traders. They are not meant to be a solicitation or recommendation to buy or sell a specific financial instrument.