• USDJPY continues to trade with resilience near April’s bar as forecasts point to robust US jobs data

• EURUSD holds within caution area as the ECB prepares to cut interest rates

• USDCAD directionless despite a probable rate cut in Canada this week

 

Nonfarm payrolls, ISM business PMIs --> USDJPY

The Fed is not expected to cut interest rates before September according to futures markets, and although the wolves of Wall Street are not fond of this scenario, the US dollar can enjoy more winning moments in FX markets.

Having almost recouped April’s downfall, USDJPY might keep seeking help from the data to breach the wall at 157.80-158.40 and extend its 2024 uptrend to 159.35 or even higher to the 34-year high of 160.20 registered at the end of April.

The Fed’s favorite core PCE inflation index held steady at 2.8% y/y last week as analysts anticipated, increasing concerns that the pace of price increases might stay above the central bank’s 2.0% target for longer. This risk could be heightened by the release of upcoming data, with investors eagerly awaiting a strong employment report and better business conditions.

Friday’s US nonfarm payrolls are forecast to bounce up to 190k in May from 175k previously, keeping the unemployment rate flat at 3.9%. Average hourly earnings are expected to hold stable as well at 3.9% y/y. Meanwhile, the ISM manufacturing and non-manufacturing business PMI figures could remain robust in the expansion area, further justifying the delay of rate cuts.

In the event of a negative surprise, traders might back a September rate cut. Note that there is no policy meeting scheduled in October before the US election. Thus, the timing of September’s gathering could be ideal for implementing policy changes if the labor market data indicates significant weakness. In this case, USDJPY might lose some ground to retest the 156.35 region and then the 154.50-155.00 support zone. Technically, downside risks have not faded out yet.

ECB rate decision --> EURUSD

Meanwhile in the eurozone, the ECB is expected to conclude its meeting this Thursday with a confirmed quarter point rate reduction. Policymakers have clearly communicated their intention to lower borrowing costs over the past couple of weeks, though the latest uptick in the CPI inflation numbers convinced traders that a continuous easing policy should not be guaranteed.

Hence, relatively hawkish policy guidance could activate a new bullish wave in EURUSD, likely lifting the pair above the tough 1.0860-1.0880 resistance territory, which has been capping positive actions over the past two weeks. The next target could be the 1.0940-1.0970 zone.

If policymakers provide an uncertain outlook for the eurozone economy and endorse a meeting-to-meeting policy evaluation, selling interest could increase, leading to a reevaluation of the 1.0800 round level. A steeper decline could stretch towards the 1.0740-1.0755 support territory if the 50- and 200-day simple moving averages (SMAs) give way too.

BoC rate decision --> USDCAD

The Bank of Canada’s policy announcement should not be missed on Wednesday either. Despite sharing historical policy ties and borders, the US and Canada are currently experiencing diverging economic conditions. Canadian inflation continued to ease in April and within the BoC’s 1-3% control range. Although this figure is still above the 2.0% midpoint target, policymakers might not hesitate to lower interest rates by 25 bps prior to the ECB on Wednesday. Futures markets provide 82% probability for a June rate cut, but the odds for a July reduction are also high given the relatively sluggish employment and GDP growth in the Canadian economy.

If the BoC surprisingly decides to follow the Fed’s steps, keeping interest rates unchanged and backing a data-dependent approach for its next policy decision, USDCAD could break below the 1.3622 floor to retest the key 1.3578 territory and the 200-day SMA. Failure to pivot there could trigger a fast downfall to 1.3537. From a technical perspective, a bearish correct could still be possible in the short term.

A rate cut this week or alternatively a confirmed July reduction might pressure the loonie, pushing USDCAD above the current barrier of 1.3658 and towards the 1.3740-1.3775 key region.