Article Highlights

  • ADP non-farm employment change at 263K vs. 184K forecast in March
  • U.S. ISM non-manufacturing PMI down from 57.6 to 55.2 vs. 57.0 forecast
  • U.S. crude oil inventories increased by 1.6 million barrels
  • FOMC minutes: Fiscal policy might not come into effect until next year
  • FOMC minutes: Gradual rate hikes still appropriate
  • FOMC minutes: Officials looking into reinvestment shift later in 2016
  • House Speaker Paul Ryan: Tax reform could take longer than healthcare overhaul
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The Greenback had a rough day as stock indices and bond yields sank on weaker hopes of seeing a healthcare overhaul and tax reform from the Trump administration within the year.

Major Events:

U.S. tax reform? Not in 2016! – So much for announcing “something phenomenal” about taxes! Dollar bulls and fans of the Donald were disappointed to find out that the administration isn’t likely to finish their healthcare overhaul plans within the year, which means that tax reform will also be pushed back much later.

Recall that the Obamacare repeal is one of the most crucial points of the Trump administration’s reform agenda as this could allow them to trim the government deficit and leave room to cut taxes while still being able to fund their planned increase in infrastructure spending. Talk about hitting two birds with one stone! Unfortunately, getting the members of Congress to to throw said stone is much easier said than done.

According to Speaker Paul Ryan, tax reform could even take longer to accomplish than replacing Obamacare. It doesn’t help that their current pace of progress with the latter is moving at a snail’s pace. “The House has a (tax reform) plan but the Senate doesn’t quite have one yet. They’re working on one. The White House hasn’t nailed it down,” Ryan shared. “So even the three entities aren’t on the same page yet on tax reform.”

With that, the S&P ended the session down 0.31%, the Nasdaq closed 0.58% lower, and the Dow 30 index dropped 0.20%. U.S. 10-year bond yields fell 3 basis points to 2.33% and 2-year bond yields slid 2.6 basis points to 1.226%. Gold also dipped while WTI crude oil fell 0.33% to $50.88 per barrel.

FOMC minutes not so chipper – Forex junkies already had pretty high expectations for the FOMC meeting minutes since a number of committee members had mentioned in their recent testimonies that they support the idea of seeing three rate hikes this year. However, traders seemed disappointed to find out that Fed officials still have a few concerns in mind and aren’t feeling very optimistic about seeing fiscal stimulus this year either.

As expected, the transcript of the Fed’s latest policy huddle indicated that gradual rate hikes are still appropriate and that policymakers are now turning their attention to the balance sheet. This means that they are considering dumping $4.5 trillion worth of bonds that they’re holding this year. This would have more or less the same effect as hiking interest rates as it would mop up excess liquidity and slowly reverse the impact of QE1, QE2, and QE3 operations they conducted after the 2008 financial crisis.

When it comes to their economic assessment, Fed officials still seemed divided on their employment outlook and how close inflation is running to their 2% target. Policymakers also highlighted the uncertainty surrounding fiscal policy changes but added that risks are tilted to the upside, even though the impact of these aren’t likely to kick in until next year.

In a nutshell, potential balance sheet adjustments and weaker expectations of fiscal stimulus this year have dampened Fed rate hike expectations, leading many to doubt that the central bank can stay true to its forecast of increasing interest rates two more times for the rest of 2016.

Mixed U.S. data – You win some, you lose some. While the ADP non-farm employment change reading printed a stronger than expected 263K increase in hiring for March versus the projected 184K gain, the previous reading was downgraded from 298K to 245K so the upcoming NFP might print similar results.

Also, the ISM non-manufacturing PMI posted a steeper than expected drop from 57.6 to 55.2 to reflect a much slower pace of industry expansion compared to the projected reading at 57.0. Components of the report indicated that employment fell from 55.2 to 51.6 while business production and new orders dropped. The index for inventories indicated contraction at 48.5, down from the earlier 52.0 figure.

Major Market Movers:

USD –  The scrilla was actually off to a good start on relatively upbeat U.S. economic releases but wound up sliding lower during the latter half of the session.

EUR/USD dipped to a low of 1.0635 then scurried back up to a high of 1.0682, USD/JPY tumbled from 111.46 to a low of 110.45, AUD/USD is up from .7568 to a high of .7589, and USD/CHF rallied to 1.0079 then reversed to 1.0035.

Watch Out For:

  • 2:45 am GMT: Chinese Caixin services PMI (53.2 expected, 52.6 previous)
  • 6:00 am GMT: Japanese consumer confidence index (43.5 expected, 43.1 previous)

See also:

London Session Recap
Asian Session Recap

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