- Rates: Fed cuts IOER; soft inflation transient?
A disappointing US manufacturing ISM and a 5 bps IOER cut by the Fed were offset by Fed Chair Powell’s suggestion that soft inflation was transient. US Treasuries eventually closed a tad softer. Today’s session is probably less interesting, bridging yesterday’s Fed with tomorrow’s payrolls and non-manufacturing ISM. The US S&P 500 shows a bearish engulfing pattern. - Currencies: Fed Powell blocks further decline of the dollar, for now.
The dollar traded in the defensive in the run-up to the yesterday’s Fed policy decision, but rebounded as Fed’s Powell signaled that there is currently no case for a rate cut. The dollar rebounded during the press conference. Still the US currency remains vulnerable as soft US price and/or activity data might easily revive calls for a Fed rate cut.
The Sunrise Headlines
- US equities lost ground (-0.75%) yesterday after setting fresh record highs earlier in the trading day. Asian shares are trading mixed with mainland Chinese and Japanese bourses closed.
- The US Fed left its policy rate unchanged at 2.25%-2.50%. Fed chief Powell added that he sees no immediate need to move interest rates either higher or lower. The Fed expects inflation to rebound and the economy to stay healthy.
- The US and China concluded productive trade talks in Beijing yesterday, with some sources expecting a deal by the end of next week, incl. the removal of some of the US import tariffs. Negotiations continue in Washington next week.
- UK PM May and Labour leader Corbyn have both signalled to edge closer to a Brexit deal. May said she could move on one of her key red lines and allow the UK to maintain a joint customs regime with the EU, a key Labour demand.
- US April ISM Manufacturing fell to 52.8 from 55.3 in March (vs. 55 consensus), with new orders and employment dragging sentiment down. ADP employment change beat expectations in April with a 275k growth, up from 129k in March.
- Bank of Canada chief Poloz said he still foresees a need for policy interest rates to rise, once factors that are currently slowing the economic expansion will vanish. He does thinks accommodative rates are needed for now.
- Today’s economic calendar contains this week’s jobless claims in the US. The Bank of England holds its April policy meeting. Norway and Sweden print April Manufacturing PMI’s. ECB chief economist Praet speaks
Currencies: Fed Powell Blocks Further Decline Of The Dollar, For Now.
Powell blocks further USD loss, at least for now.
The dollar traded soft in the run-up to the Fed decision yesterday. The ADP job report was strong but the US manufacturing ISM signalled a sharp slowdown in the sector, weighing on the dollar. The USD dropped (temporarily) further as the Fed acknowledged recent decline in both headline and core inflation. However, US yields and the USD rebounded as Fed’s Powell later indicated that this decline was seen as transitory. The FOMC agreed that there was no case for a rate move in either direction. EUR/USD dropped from the 1.1265 area to close at 1.1196. USD/JPY also reversed an initial decline to finish the session at 111.38.
Asian equity markets are trading mixed to slightly higher, but key Japan and mainland China markets are closed. The dollar shows no clear trend (DXY near 97.60; USD/JPY near 111.55). EUR/USD tries to regain the 1.12 handle. Risky assets are slightly supported by headlines (CNBC) that the US and China are close to a trade deal.
Later today, the final EMU manufacturing PMI’s are expected to confirm a sluggish momentum in the sector. In the US, the jobless claims, productivity and labour cost data and the final March order data will be published. However, USD traders will look forward to tomorrow’s US payrolls. Headlines on trade and/or Brexit remain wildcards.
Earlier this week, the euro was supported by better than expected EMU data while the dollar traded in the defensive ahead of the Fed meeting. Fed’s Powell didn’t give in to calls for a (precautionary) rate cut. This might prevent further USD selling for now. That said, calls for a Fed rate cut will easily resurface if US activity and/or price data would soften further. We retain the working hypothesis that sustained USD gains from current levels won’t be easy. A break of EUR/USD below the 1.1110 support area might be difficult.
Yesterday, sterling gained some ground on rumours that the conservatives and labour were coming closer to a Brexit deal. EUR/GBP dropped below the 0.86 level. Today, the focus for sterling trading will be on local elections in the UK. The BoE will also announce its policy decision and publish an inflation report. The BoE will probably continue to support the idea of a limited tightening longer term, but stay on hold as long as uncertainty on (the consequences of) Brexit persists. The day-to-day momentum is GBP-constructive, but we don’t preposition for a big leap higher.
EUR/USD: Fed Powell blocks further USD decline, but US currency probably remains vulnerable to soft US data.
