US ADP Data Surprises Traders While Investors Are Waiting For A Bigger Picture To Unfold

The US ADP data released today demonstrated the stability and strength of the US economy. Traders have been hoping for the US economy to show decent job data, but the fear among traders and investors has been that strong US job data will make the Fed hold rates higher for longer as they want to tame inflation. However, many believe that the US ADP data doesn't provide a complete picture, as the Fed primarily focuses on the US NFP number, due later this week. This is keeping most traders on the sidelines as the dollar index continues its upward trajectory, while speculators have positioned themselves for a larger move in the dollar index in a specific direction based on two key factors. Here is more on this.

 Going into today’s price action, forex traders have been cautious for a number of reasons. Firstly, the market has experienced limited liquidity due to the closure of many European markets today for the May 1st holiday. In addition, traders have been waiting for the US ADP data, and generally speaking, the market doesn’t like to bet big ahead of major economic news, especially the US ADP data, which usually sets the tone for the US NFP data, which will come out on Friday.

The expectations for the US ADP number were 179K, but the actual number came in at 192K, and the previous number stood at 208K. Looking at the past trend, it is clear that the US job market is strong, and this gives a lot of leverage to the Fed to play with their monetary policy as they desire. Because we have seen strong US ADP data today, forex traders believe that we are going to see a decent number for the US NFP, for which the forecast is 238K while the previous reading was 303K. As mentioned above, the Fed pays closer attention to the US NFP number, and a strong reading on Friday would give them a lot of leverage in terms of playing with their monetary policy.

 But before we get the US NFP data, later today we have the Fed Press Conference and their decision on the interest rate. The focus is going to be on the Fed’s inflation target and the current inflation number. The Fed has stated that the inflation reading is moving to the upside, which is not the desired direction. The Fed’s target of 2% for inflation is also non-realistic; many traders think that in today’s commentary we will hear some important comments on this. This is also where speculators place their bets.

 In terms of the dollar’s price action, it is more worth paying attention to the (GBP/USD), and the reason that I say this is because both the BOE and the Fed would like to reduce the interest rate, but the data that they have is not allowing them to even come close to this point. Having said that, traders do believe that the slowdown in economic growth in the UK has given some leverage to the BOE, which can use this situation to make a case for a lower interest rate. However, the situation for both remains tough.

 In terms of the price action for the GBP/USD, the clear trend continues to remain to the downside here. However, the price has formed a reverse head and shoulder pattern to which technical analysts pay attention, but for this pattern to remain valid, the price needs to stay above 1.2459. Should the price breach this pattern, we anticipate a move towards the green line on the chart below. On the flip side, the red line represents strength coming for the sterling, and if the price moves above this level, we could see more higher moves.

Forex Trading Chart by AvaTrade : GBPUSD 

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