Fed unchanged, Powrell not quite as hawkish as expected. USDJPY takes another dive.

Good morning

Well what a welcome to May.  Woke up in the night to witness a spectacular thunderstorm, heavy rain and incredible lightning.  Been a long time since i’ve seen lightning like that. 

It’s also a rare event that I have to rescue animals, but yesterday morning during a meeting I was alerted two the fact there were two Egyptian geese in my driveway, with their brood of five or six baby geese.  It has happened before, they get lost and then can’t find their way to the river that runs at the back of my garden.  Much shepherding later, they were safely directed through to the garden where they trotted off happily, the father goose perhaps muttering something like ‘we’ll laugh about this one day’ and Mother goose was scolding him for going the wrong way.

Anyway, to the markets, where a few things are worth mentioning.  I’ll have to start with UDSJPY which seemed to be trotting along quite happily in the mid-high 157s when, late in the US session, huge selling took it to 153.00 is the space of thirty minutes or so.   It had recovered a lot of those losses, reaching 156.25, but as I type is back down to 155.25.  Still no official word on intervention but i’d struggle to see what else would create that sort of move. 

Helping the USDJPY move lower initially was a marginally less hawkish Fed than had been expected.  Yes, of course they left rates unchanged and made it clear the current path of inflation put rate cuts off the table, however Powell did add that policy was still sufficiently restrictive, thereby steering the markets away from possible rate rise talk.  Rate cuts are much delayed but not completely off the table in the coming months although if we were to see one in 2024 it can only be late, perhaps even as late as December.  USD weakened, GBPUSD trading up from 1.2480 to 1.2550 and EURUSD from 1.0670 to 1.0730.  For the record they are now 1.2525 and 1.0715, leaving GBPEUR 1.1690.

Earlier in the day we’d seen some mixed US jobs numbers, with ADP coming in higher than expecetd and with an upside reision to the previous months reading.  JOLTS however was on the low side, suggesting wage growth could begin to moderate and this could encourage the Fed not to pay too much attewntion to the recent higher than expected ECI.  Wage growth could also be impacted by the number of immigrants looking for work, which is liekly to drag wages lower.  In addition to the employment numbers, we had the latest ISM manufacturing PMI.  The headline was expected to come in above 50, but actually disappointed at a lowly 49.2.  Worth noting though that the employment index came in higher than last time.

BoC’s Macklem spoke yesterday and managed to sound pretty dovish, saying they are getting close to cutting rates and adding that BoC rate moves are not dictated by the Fed.  USDCAD traded to a high of 1.3785, GBPCAD to 1.7225, although both are off those highs right now at 1.3720 and 1.7185 respectively.

China President Xi is heading to Europe at the weekend wherer he’ll visit France, Serbia and Hungary.  I’m not sure if he will go to Germany, who recently arrested four Chinese spies.  Hungary is an odd choice but I suspect he’ll have noticed that they are not the most pro-Europe country and the sceptic in me thinks they could be looking to create a greater divide.

Not much in the way of economic data today, the main event comes with the US nonfarm payroll numbers tomorrow.   For now we’ll keep an eye on Yen for further signs of intervention and see whether USD loses further ground as the markets digest Powell’s words yesterday.

-  09.00 EU manufacturing PMI

-  13.30 US initial jobless claims

-  13.45 BoCs Macklem speaks

-  15.00 US factory orders

-  21.15 ECBs Lane speaks

USD higher as Fed's Powell expected to push back on rate cuts

Good morning

Welcome to May. It is a holiday in many parts of the world including much of Europe but not here in the UK.  We have to wait until Monday for our day off. 

USD was up a little yesterday as the employment cost index came in higher than expected, a weak Chicago PMI number prevented further USD gains initially but we have seen gradual USD strength overnight which has taken GBPUSD from a high yesterday of 1.2555 to 1.2470 and EURUSD from 1.0735 to 1.0650.  GBPEUR has held above 1.1700, stuck in a tight range between 1.1705-1.1715, as GBP and EUR have moved pretty much in unison to the USD.

USDJPY has drifted higher with the stronger USD, now 157.95 up to 157.55, while the market continues to look for any sign of official intervention from Japan.  Yen has certainly been calmer with none of the sharp spikes higher or lower, but it is an uneasy calm.  BoJ minutes due tonight may show to what extend the central bank were worried about Yen weakness.

FOMC rate announcement this evening, and anything other than unchanged rates would be a huge shock.  Remember it was only a few months ago that June was being lined up as the first month for a cut.  There is no chance of this now, that ECI number yesterday was just the latest indication that inflation and the labour market are showing no signs of abating.  Indeed, rate rise are probably more likely but we see only the tiniest of chances of this today. 

We will not get an updated set of forecasts or ‘dot plots’ from the Fed at this meeting so the key could be Powell and whether he says anything new about the path of rates through 2024, the real question is how hawkish he sounds.  He could push back on rate cuts, but he could go a stage further and mention the chance of a rate rise.  That would set USD alight, particularly given the potential for slightly less liquid markets due to those EU and Asian holidays.

There is no major data from Europe today given the holidays, but we do have some US numbers out before the FOMC announcement.  We’ll see the latest ADP and JOLTS employment numbers, while we will also see the latest manufacturing PMI from ISM.  There is a question over whether this will come in over 50 again, if it does it will be a good sign that this part of the US economy could have turned a corner and would likely offer a small degree of support to the USD. 

In sport, Ipswich overcame a determined Coventry to take them into second place in the Championship.  It now all comes down to Saturday to decide who takes that second automatic promotion place, Leeds or Ipswich. Ipswich have to draw or win to claim that important place, while Leeds need to win and hope for Ipswich to lose.  The team finishing third will go into the play-offs which ar exciting for the neutral but nerve-wracking for those involved. 

Elsewhere, Harry Kane’s Bayern Munich drew with Real Madrid in the first leg of their Champions leagues semi-final, while Borussia Dortmund take on PSG this evening. Could be an all-German final which will really put paid to England getting that fifth Champions leagues spot for next season, if it is not already out of reach now.

We’ve had a couple of days of decent enough weather, well its been dry and a bit sunny, but the forecast here suggests we’re in for thundery showers this afternoon.  Indeed once again I look ahead to the forecast for the next couple of weeks and every day bar one has a blob of rain showing.  It might only be a drizzle or a brief shower, but its certainly not what I’d be hoping or expecting.  I’ve got some workmen here painting my windows, not exactly the ideal weather for that either.

Have a great day

-  13.15 US ADP employment

-  14.30 CAD S&P manufacturing PMI

-  15.00 US manufacturing ISM, JOLTS job openings

-  19.00 FOMC rate announcement

-  19.30 FOMC press conference

-  00.50 BoJ minutes

-  02.30 AUS trade balance

EU data this morning in focus, markets stay wary of further Yen moves

Good morning

All eyes remain on the Japanese Yen after the intervention sent USDJPY and yen crosses lower.  I say intervention, nothing has been officially confirmed but it does look suspiciously like intervention.  We’ve seen a few smaller dips in USDJPY since the main event on Sunday night, yesterday morning USDJPY fell sharply from 157.10 to 154.55, and late in the day it fell from 156.50 to 155.10.  Whether these moves were from official action or simply an indication of how nervous the markets are is impossible to tell until we get the FX operation data.  USDJPY currently trades a touch below 157.00, a level that seems to have capped the upside overnight.  GBPJPY is 196.60, EURJPY 167.90.

GBPUSD is currently 1.2530 having seen a high overnight of 1.2565.  Plenty of eyes on EUR this morning given we have several data releases including EU inflation and GDP.  EURUSD is currently 1.0705 having recovered from a dip to 1.0690 earlier this morning.  GBPEUR clawed its way back up above 1.1700 yesterday afternoon and has held above there ever since, currently 1.1705 from a high around 1.1720.  ECB officials have recently been talking about the geopolitical factors that could push inflation higher, but for now still seem fixed on a June rate cut.  What happens after June remains to be seen.  The market thinks we’ll have more rate cuts but ECB will want to see what impact a June cut will have on EUR, plus monitor incoming data closely.

Plenty of attention of course on interest rates.  The divergence between Fed and other central banks is becoming more and more apparent, with the Fed likely to remain on hold, even seeing talk of higher rates, while others such as ECB and to some extent BoE are clearly looking at rate cuts.  Mind you, I see Goldman Sachs still see potential for two Fed rate cuts this year, the first in July and the next in November.  They think inflation reports will soon come in softer, offering some breathing space for the Fed.  The Fed rate meeting begins today, with the announcement coming tomorrow evening. 

Elsewhere, AUD lost ground after weaker than expected retail sales data, the headline coming in at -0.4% vs an expected +0.2%, with the previous month also being revised lower.  AUD also wasn’t helped by weaker Chinese PMIs overnight.  GBPAUD has seen a high of 1.9230 this morning having been as low as 1.9045 early yesterday morning.  I had recently mentioned the potential for RBA rate rises in the coming months, but weak data will certainly dampen some of those calls.  China is now closed for the rest of the week for May holidays.

I mentioned China gold reserves a while back.  They have been building them for some time now, I’m sure I read that they now total around $135billion.  There is some speculation as to why they are building such reserves, some are thinking it is to eventually support China in moving away from the USD’s reserve currency status, while others see it as a war chest to protect them from possible sanctions that would almost certainly arise after a Taiwan invasion.  Either way, there is always a reason and while it may be unfair to be thinking the worst, we should certainly be aware and prepared for it.  Meanwhile China re flexing their muscles with some aggressive action against Philippine ships in a disputed area of the South China Seas. 

Humza Yousaf did resign from his post as Scotland First Minister, choosing to go before he was pushed.  Attention now will be on who stands for the leadership role and whether the winner of that race will get the support of any opposition parties with whom they could develop some sort of power sharing arrangement.

In other news, Leicester secured the Championship title with a win over Preston yesterday evening.  The race is on for the second automatic promotion spot, Ipswich, currently in third, could move above Leeds if they beat Coventry this evening.  A good chance this comes down to the last match of the season on Saturday. 

We had a decent day weather-wise yesterday, hoping for more of the same today but the rest of the week looks a bit mixed.  Temperatures still lower than we’d like for this time of year, surely they have to pick up at some point?  It’ll be May tomorrow!

Have a great day

-  08.55 german unemployment

-  09.00 german GDP

-  10.00 EU HICP, GDP

-  13.30 US employment cost index

-  13.30 CAD GDP

-  14.45 US Chicago PMI

-  15.00 US consumer confidence

-  22.00 RBNZ financial stability report

-  23.45 NZ unemployment