European Open Preview – Dollar whipsaws after Fed; Pound holds firm ahead of BoE
May 2, 2019 8:26 am
US dollar swings sharply after Powell tones down Fed’s dovish statement
Hawkish Powell puts dent on equities rally
Pound holds near highs ahead of Bank of England meeting as hopes rise May will agree to a customs union
Rate cut bets ease after Powell’s press conference
The Federal Reserve kept interest rates on hold yesterday as expected and the dollar initially fell on the announcement as the FOMC statement highlighted the recent decline in inflation. However, the greenback quickly reversed course and shares on Wall Street took a tumble after Fed Chairman Jerome Powell took to the podium. Powell was keen to stress that the current soft patch in inflation was likely due to transitory factors and he sees no near-term case to adjust the federal funds rate from current levels.
Powell’s relatively upbeat remarks on inflation and growth in the US contradicted with a somewhat more dovish statement. Speculation that the Fed is getting closer to a rate cut was fuelled from the statement as well as from a 5-basis point reduction by the Fed in the interest paid on excess reserves. However, Powell’s remarks dashed hopes of an early rate cut and expectations of a year-end rate reduction receded slightly.
Consequently, yields on US Treasury notes bounced back from lows, with the 2-year yield, which is the most sensitive to short-term changes in the fed funds rate, jumped from a one-month low of 2.206% yesterday to a high of 2.349% earlier today.
In forex markets, the dollar index climbed from a low of 97.15 to recover around 97.70, while against the yen, the greenback was trading around 111.53 at the European open after coming close to dipping below the 111 handle yesterday.
Growth worries persist despite signs of green shoots
Recent stronger-than-expected growth figures from China and the United States, and now from the Eurozone as well, have done little to dispel concerns that a sharper downturn is still on the horizon. Even in the US, where growth has been more resilient to the global slowdown, some data continues to cast doubt over the outlook. The closely-watched ISM manufacturing PMI, released yesterday in the US, fell to a 2½-year low in April. But there was good news from the ADP employment report, which showed stronger-than-expected jobs growth in April and comes ahead of Friday’s all-important nonfarm payrolls report.
In the Eurozone, the focus after the impressive Q1 GDP growth figures will move onto the flash inflation prints for April on Friday. Strong CPI data could help the euro regain its positive footing from the GDP boost after coming under pressure yesterday from the dollar’s rebound, which pushed the single currency back below the $1.12 level.
The risk-sensitive Australian and New Zealand dollars also slid sharply yesterday but were steadier today. The antipodean pairs could encounter further volatility in the lead up to next week’s policy meetings by the Reserve Bank of Australia and the Reserve Bank of New Zealand.
Brexit headlines lift pound again; Bank of England meets
The Bank of England will announce its latest policy decision today following a two-day meeting. In what would normally have been an important day for pound traders as this month’s meeting also includes the quarterly inflation report and a press conference, today’s ‘Super Thursday’ is unlikely to receive a big response in the markets as Brexit continues to remain the main driver for the British currency.
The BoE is widely anticipated to keep policy unchanged and may lower its growth and inflation forecasts. This could weigh on the pound slightly, although if news reports continue to suggest the UK government is warming to the idea of accepting Labour’s proposal of a customs union with the EU post-Brexit, a dovish BoE would do little to prevent sterling from surging higher.
The pound briefly topped the $1.31 level after the prime minister, Theresa May, told a parliamentary committee yesterday that the government’s customs union plan wasn’t that different to Labour’s and that she’s setting the middle of next week as a deadline to make significant progress in the talks with the opposition.
Rate cut bets ease after Powell’s press conference
The Federal Reserve kept interest rates on hold yesterday as expected and the dollar initially fell on the announcement as the FOMC statement highlighted the recent decline in inflation. However, the greenback quickly reversed course and shares on Wall Street took a tumble after Fed Chairman Jerome Powell took to the podium. Powell was keen to stress that the current soft patch in inflation was likely due to transitory factors and he sees no near-term case to adjust the federal funds rate from current levels.
Powell’s relatively upbeat remarks on inflation and growth in the US contradicted with a somewhat more dovish statement. Speculation that the Fed is getting closer to a rate cut was fuelled from the statement as well as from a 5-basis point reduction by the Fed in the interest paid on excess reserves. However, Powell’s remarks dashed hopes of an early rate cut and expectations of a year-end rate reduction receded slightly.
Consequently, yields on US Treasury notes bounced back from lows, with the 2-year yield, which is the most sensitive to short-term changes in the fed funds rate, jumped from a one-month low of 2.206% yesterday to a high of 2.349% earlier today.
In forex markets, the dollar index climbed from a low of 97.15 to recover around 97.70, while against the yen, the greenback was trading around 111.53 at the European open after coming close to dipping below the 111 handle yesterday.
Growth worries persist despite signs of green shoots
Recent stronger-than-expected growth figures from China and the United States, and now from the Eurozone as well, have done little to dispel concerns that a sharper downturn is still on the horizon. Even in the US, where growth has been more resilient to the global slowdown, some data continues to cast doubt over the outlook. The closely-watched ISM manufacturing PMI, released yesterday in the US, fell to a 2½-year low in April. But there was good news from the ADP employment report, which showed stronger-than-expected jobs growth in April and comes ahead of Friday’s all-important nonfarm payrolls report.
In the Eurozone, the focus after the impressive Q1 GDP growth figures will move onto the flash inflation prints for April on Friday. Strong CPI data could help the euro regain its positive footing from the GDP boost after coming under pressure yesterday from the dollar’s rebound, which pushed the single currency back below the $1.12 level.
The risk-sensitive Australian and New Zealand dollars also slid sharply yesterday but were steadier today. The antipodean pairs could encounter further volatility in the lead up to next week’s policy meetings by the Reserve Bank of Australia and the Reserve Bank of New Zealand.
Brexit headlines lift pound again; Bank of England meets
The Bank of England will announce its latest policy decision today following a two-day meeting. In what would normally have been an important day for pound traders as this month’s meeting also includes the quarterly inflation report and a press conference, today’s ‘Super Thursday’ is unlikely to receive a big response in the markets as Brexit continues to remain the main driver for the British currency.
The BoE is widely anticipated to keep policy unchanged and may lower its growth and inflation forecasts. This could weigh on the pound slightly, although if news reports continue to suggest the UK government is warming to the idea of accepting Labour’s proposal of a customs union with the EU post-Brexit, a dovish BoE would do little to prevent sterling from surging higher.
The pound briefly topped the $1.31 level after the prime minister, Theresa May, told a parliamentary committee yesterday that the government’s customs union plan wasn’t that different to Labour’s and that she’s setting the middle of next week as a deadline to make significant progress in the talks with the opposition.
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