Fed Sit on the Fence as Focus Moves to Threadneedle Street

The dollar gains as the Fed re-affirm their patient policy stance ahead of today’s Bank of England decision and smorgasbord of economic data.

Previous Day's Market Highlights

The Federal Reserve kept interest rates on hold on Wednesday, reaffirming their commitment to a patient policy stance with the economy performing solidly and inflation remaining muted. The Fed did comment that inflation has declined over the last year, and removed reference to this being due to energy prices, though Chair Powell firmly pushed back on assertions that this was a dovish policy shift, stating that low 1st quarter inflation is likely transitory. This comment largely rules out the possibility of an imminent cut to the Fed Funds Rate, with market pricing adjusting accordingly, now giving a 49% chance of a cut by year-end, compared to 67% before the meeting. The Fed did however make a technical change to the interest rate on excess reserves (IOER), cutting this rate by 5bps to improve overnight liquidity by encouraging banks to move their excess reserves out of the Fed and into the banking system. It is important to note that this is not a monetary policy shift, and is a purely technical change to ensure the Fed maintain control of interest rates within their target range. For the dollar, with markets expecting a dovish-sounding Fed, the neutral policy stance and relatively upbeat tone was a slight surprise, with the dollar index rallying 0.5% from its lowest levels of the day after Chair Powell’s comments on transitory inflation. Over the day, the greenback gained 0.1%, the first daily gain in 4. 
Elsewhere, manufacturing PMI figures were in focus, with the data painting a mixed picture. Figures from the UK fell, as expected, to 53.1 as the impact of pre-Brexit stockpiling faded from the data. Nonetheless, the pound gained ground over the day, adding around 0.25% against the dollar and euro. Against the dollar, sterling recorded its 4th consecutive daily gain, the pound’s best run since late-February. PMI figures from across the pond were more disappointing however, with the Canadian manufacturing sector contracting for the 1st time since February 2016, dragging the loonie 0.4% lower. From the US, ISM manufacturing PMI from the fell to 52.8, the lowest level since October 2016. This had little effect on the dollar however, largely cancelling out the positive impact of above-forecast ADP nonfarm employment change figures. ADP reported the US economy adding 275,000 jobs in April, well above expectations, though the correlation with Friday’s official nonfarm payrolls figure is doubtful at best and technical factors may have artificially inflated the figure. The euro did little on Wednesday with eurozone markets closed for a public holiday. 
Away from FX, equity markets declined on both sides of the Atlantic. In Europe, with most bourses closed for May Day, focus fell on London’s FTSE 100. The index closed 0.4% lower, falling to its lowest level in a month as the impact of a strengthening pound continues to exert downward pressure. Meanwhile, from the US, the benchmark S&P 500 fell 0.75%, as investors ruled out the prospect of Fed rate cuts. Finally, oil prices lost ground, pressured by an increase in US stockpiles. Brent lost 0.3% over the day, while US WTI crude tumbled by 0.85%. 

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1660 1.1665 1.1512 1.31%
GBP/USD 1.3050 1.3132 1.2866 2.03%
EUR/USD 1.1195 1.1323 1.1110 1.88%
GBP/AUD 1.8595 1.8618 1.8093 2.82%
GBP/NZD 1.9695 1.9715 1.9242 2.40%
GBP/CAD 1.7535 1.7570 1.7300 1.54%

Today's Market Highlights

After yesterday’s Fed meeting, attention shifts to Threadneedle Street today, with the Bank of England due to announce their latest monetary policy decision at noon alongside the quarterly Inflation Report. Markets expect no change to policy, with a unanimous vote in favour of keeping rates on hold the most likely scenario, however one or two hawkish dissenters voting in favour of a hike cannot be ruled out - bearing in mind the UK’s tight labour market, with wage increases remaining close to post-crisis highs. Barring the vote split, attention is likely to centre around the continued intention for interest rates to increase at a “gradual pace” to a “limited extent”. Removal of this language, though unlikely, would be a clear dovish signal, showing the BoE shedding their tightening bias. Other areas of focus include the BoE’s latest economic forecasts, though expectations for growth and inflation are likely to remain broadly similar to February’s Inflation Report, with the possibility of a modest upgrade due to dissipating Brexit uncertainties.  Attention will also fall on Governor Carney’s press conference at 12:30, where the remarks in the policy statement will be expanded upon. Overall, the BoE are likely to keep the door ajar for future policy tightening, while emphasising the uncertainties surrounding the policy outlook. Risks to sterling appear biased to the upside should the meeting have a hawkish tilt which markets appear unprepared for. 

Investors will also be keeping an eye on a couple of other events in the UK today. Firstly, local elections will be held, with the Conservative Party expecting to lose a large number of their local councillors, as part of a voter backlash due to a failure to deliver Brexit on time. A severe drubbing in local elections, ahead of EU elections in a couple of weeks, would likely further intensify the pressure on the Prime Minister to lay out a timetable for her departure. Also of note will be construction PMI figures for April, with data expected to show the sector rebounding into expansionary territory for the 1st time since January, with the index rising to 50.3. 

Elsewhere, after yesterday’s public holiday, focus for the eurozone will fall on final manufacturing figures for April. Expectations are for the data to fall broadly in line with the previous flash estimate, confirming that the eurozone manufacturing sector remained in contraction for a 3rd consecutive month. Meanwhile, from the US, markets will be paying attention to the weekly jobless claims figure, expected to decline to 215,000, in addition to March factory orders, expected to erase February’s decline and record a solid gain of 1.5% on a month-on-month basis. 

Finally, a couple of central bank speakers are due, with outgoing ECB Chief Economist Praet and Bundesbank President Weidmann set to address markets. The latter will likely be of more interest, with the typically hawkish Weidmann being mooted in some circles as a potential successor to Draghi at the conclusion of his term later this year.

Today's Economic Calendar

Time Currency Release Consensus Previous
9:00am EUR Manufacturing PMI (Final - April) 47.8 47.8
9:30am GBP Construction PMI (April) 50.3 49.7
12:00pm GBP Bank of England Rate Decision & Quarterly Inflation Report 0.75% 0.75%
12:30pm GBP BoE Gov. Carney Press Conference
1:30pm USD Initial Jobless Claims 215k 230k
3:00pm USD Factory Orders (m/m - March) 1.5% -0.5%