The FOMC kept its policy unchanged yesterday, while the statement accompanying the decision was little changed from previously, maintaining a neutral tone. Perhaps the most important point was that policymakers view the Q1 slowdown in GDP as transitory, implying they expect growth to regain speed in Q2.
Indeed, the Atlanta Fed GDPNow model is currently pointing to a strong rebound in Q2. In a sense, the Fed reassured investors that there is no reason to worry about the soft Q1, while the Atlanta Fed model adds some validity to that view. Therefore, the probability for a June hike rose slightly after the decision and consequently, the dollar gained somewhat.
Moving forward, we believe that the market may start paying extra attention to US economic releases, as they could prove the main catalyst of whether the Fed will indeed proceed with its next rate increase in summer months. Given the Committee’s data dependence, investors are now likely to turn their gaze to tomorrow’s employment data for April. A strong report is needed for the greenback to extend its post-FOMC gains.
USD/JPY traded higher on the Fed decision, breaking above the resistance (now turned into support) of 112.35 (S1). Nevertheless, the positive leg was stopped by the 112.90 (R1) resistance level and the downside resistance line taken from the peak of the 3rd of January. Absent any shock, we expect the pair to continue oscillating near that resistance zone, waiting for tomorrow’s employment data. A solid report could encourage the bulls to overcome that zone and perhaps initially aim for our next resistance of 113.50 (R2).
UK local elections to set the tone for the General Election?
In the UK, the main event will be local elections. Even though these usually pass unnoticed, investors may look to these results as a gauge of whether Theresa May and the Conservatives are indeed as far ahead as the General Election polls indicate.
Currently, polls suggest that the Conservatives are by far the most popular party, with roughly 46% of the total vote. If they gather less support than that today, this could generate concerns that PM May could fail to gather the majority she is seeking in order to strengthen her negotiating hand. Something like that may cause sterling to give back some of its latest gains. On the other hand, a strong showing by the Conservatives could suggest that the polls are indeed correct, and thereby cause GBP to extend its gains.
GBP/USD slid yesterday following the Fed signals, to hit support slightly above the key support obstacle of 1.2850 (S1). We think that today’s elections could prove the trigger of whether the rate will rebound from that zone, or break back below it. In case the market decides not to respond to today’s results, we expect the rate to oscillate around the key 1.2850 level, awaiting for tomorrow’s US jobs data.
As for the rest of today’s highlights:
During the European day, the Norges Bank rate decision will be in the spotlight and the forecast is for the Bank to remain on hold once again. Since the last gathering, data showed that inflation slowed further. Even though we don’t expect an actual rate cut due to the financial stability risks involved, we expect the tone of the accompanying statement to remain very dovish, in which case NOK could stay under selling pressure.
As for the economic data, the UK services PMI for April is expected to have declined, but given that the manufacturing and construction indices defied similar expectations and instead surged, we see the risks surrounding that forecast as skewed to the upside. In case of a positive surprise, GBP could come under renewed buying interest.
In the US, the nation’s trade deficit is expected to have widened further in March. We also get the preliminary labor costs index for Q1 and initial jobless claims for the week ended on the 28th of April. Factory orders for March are due out as well.
As for the speakers, we have two on the agenda: ECB President Mario Draghi and Executive Board member Sabine Lautenschlager. We think that market attention will probably be on Draghi’s remarks, for any hints as to whether the Bank is likely to shift to a more optimistic bias at its upcoming meetings.
USD/JPY
Support: 112.35 (S1), 111.90 (S2), 111.40 (S3)
Resistance: 112.90 (R1), 113.50 (R2), 114.50 (R3)
GBP/USD
Support: 1.2770 (S1), 1.2700 (S2), 1.2615 (S3)
Resistance: 1.2950 (R1), 1.3000 (R2), 1.3050 (R3)
