Week Ahead: U.S. Political Risk And Data To Guide Markets

by: Alfonso Esparza

Holidays in UK and US will compress busy trading week

The US dollar is regaining momentum after the Commerce department upgraded its first-quarter GDP estimate from 0.7 percent to 1.2 percent. The US Federal Reserve was already considering the slowdown a transitory one as per the minutes from its May meeting that were released on Wednesday. US political risk is keeping the USD from taking off as the Russian connection probe is now targeting Trump's son-in-law Jared Kushner. The price of gold has risen as investors look for a safe haven during times of turbulence.

The GBP has dropped following the results of the election polls which are showing Labour has narrowed the Conservative lead with less than two weeks to go before the snap election on June 8. The questionable handling of social benefit reductions and the uncertainty following the Manchester attack have rocked the political narrative. Conservatives are still expected to win a majority, but will not come unscathed ahead of the upcoming Brexit negotiations that could set the UK for a different economic reality.

The Memorial Day holiday in the United States and the Spring Bank Holiday in the UK will keep market action subdued on Monday. US economic release will be shifted to accommodate the shorter week. The ADP private payrolls report will be released on Thursday, June 1 at 8:15 am EDT, followed by weekly unemployment claims at 8:30 am EDT, ISM manufacturing PMI at 10:00 am EDT and weekly crude inventories at 11:00 am. The US non-farm payrolls (NFP) report will be published on Friday, June 2 at 8:30 am EDT. Employment has been the strongest pillar in the recovery of the US economy with the Fed looking more closely at the wage component for signs of positive inflation ahead of the June FOMC meeting.

The EUR/USD gained 0.173 percent in the last week. The single pair is trading at 1.1196 after the USD is making a late charge on the back of an improved first-quarter GDP reading. The second estimate revised the growth of the US economy from 0.7 percent to 1.2 percent. The GDP is still lower than the 2.1 percent average since the end of the recession but is now more in line with the lack of momentum at the beginning of the year that picks up speed. The US Consumer sentiment was revised slightly to 97.1 as the index has slowly retraced since January.

The June Federal Open Market Committee (FOMC) meeting is fast approaching and Fed speakers have for the most part been supportive of more rate hikes. The market has increased the probabilities it is pricing in for the June FOMC and is close to 90 percent with only the NFP report as a potential but long shot to derail a rate increase in June.

Gold gained 1.032 in the last five days. The yellow metal is trading at $1,266.02 after geopolitical turmoil has made investors turn to a safe haven. The US probe into Russian connections within the Trump administration and the stronger tone on North Korea from President Trump ahead of the G7 meeting in Italy have shifted the focus away from Europe. The UK elections on June 9 and French parliamentary elections on June 11 are full of uncertainty, especially after the fumbles in the UK Conservative party have closed the gap of what was considered a slam-dunk win back when the snap election was called.

Gold has advanced even as the Fed minutes kept the June rate hike on the table, and comments from various Fed members have been net positive of multiple rate hikes needed sooner rather than later. The main reason is that a rate increase by the American central bank has been mostly priced in already with the market assigning a probability of 87.7 percent that the June 14 Federal Open Market Committee (FOMC) will end up with a 100 to 125 basis points range. The market's optimism does not extend to the December meeting with only 36.7 percent of the rate going to the 125 to 150 basis points range.

Oil lost 2.55 in the last week. The price of West Texas Intermediate is trading at $48.64 after the Organization of the Petroleum Exporting Countries (OPEC) meeting in Vienna ended with no surprises about the nine-month extension to the production cut agreement with members and other major producers agreeing to extend the deal until the end of March 2018.

The OPEC might have revealed too much ahead of the meeting as this time it stuck to the script that was offered when Saudi Arabia and Russia issued a joint statement backing the extension on May 15. The market quickly priced in that information, but as rumours and comments circled that nothing was set and there could be a possible longer time frame and deeper cuts, the price of oil surged. When those proved to be unfounded as the OPEC and other producers announced that the terms were exactly those from the Saudi Arabia and Russia statement, there was a sell-off of crude.

The price of oil is trending upwards on Friday's trading, and in the midterm, it will depend more on global inventories for direction. Last week US inventories shrank by 4.4 million barrels, almost doubling the forecasted number. US production will also keep prices near current levels, but a weak dollar might help the OPEC move the price towards the $60 price level.

Market events to watch this week:

Monday, May 29

  • 9:00 am EUR ECB President Draghi Speaks

Tuesday, May 30

  • 10:00 am USD CB Consumer Confidence
  • 5:00 pm NZD RBNZ Financial Stability Report

Wednesday, May 31

  • 8:30 am CAD GDP m/m
  • 9:30 pm AUD Private Capital Expenditure q/q
  • 9:30 pm AUD Retail Sales m/m

Thursday, June 1

  • 4:30 am GBP Manufacturing PMI
  • 8:15 am USD ADP Non-Farm Employment Change
  • 8:30 am USD Unemployment Claims
  • 10:00 am USD ISM Manufacturing PMI
  • 11:00 am USD Crude Oil Inventories

Friday, June 2

  • 4:30 am GBP Construction PMI
  • 8:30 am CAD Trade Balance
  • 8:30 am USD Average Hourly Earnings m/m

8:30 am USD Non-Farm Employment Change

  • 8:30 am USD Unemployment Rate

*All times EDT

For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar.