G10 and EM sell-off post FOMC

May 3, 2019

GBP

Sterling stopped just short of 5 consecutive days trading in the green yesterday as the dollar reigned supreme and took the pound as one of many victims. Even an optimistic Bank of England failed to stem the pound’s losses with Governor Carney painting an positive picture of growth and promised future rate hikes – once Brexit is wrapped up of course. The usual caveats of being slow and patient with monetary policy adjustments applied, while investment continued to be noted as a drag on growth. Despite the hawkish undertones, Brexit uncertainty continued to negate any pricing of rate hikes due to traders having to pick a time frame to trade higher interest rates in the future – thus having to put a time on the end of the Brexit impasse. With no significant move in market expectations of a BoE rate hike, the event proved null and void in moving the pound. Today, the UK Services PMI will be released, which showed a dramatic contraction in the service sector in March. The Service sector PMI is untainted by stockpiling effects, thus shows a truer reflection of the state of the UK economy, especially considering the service sector accounts for much of the UK’s GDP. Economists predict that April’s reading will show a minor expansion in the service sector, but the release at 09:30 BST will prove pivotal for sterling’s fortunes today.

EUR

The single currency didn’t move much on Final Manufacturing Purchasing Manager Indices that came out slightly stronger than expected, but still show the sector to be in contraction. The Spanish and Italian PMI showed higher economic activity than forecasted, although the German PMI reading fell marginally lower and remains very close to the most pessimistic reading in almost seven years. Today the Eurozone Flash Consumer Price Index is out, which can show a solid reading after strong German and Spanish CPI data was released earlier this week.

USD

The US dollar remains the currency in focus again today after a broad and extensive rally following Wednesday’s Fed meeting. Powell’s decision to pass off the latest fall in inflation as a transitory event proved pivotal in yesterday’s session as the dollar went bid across the board. With falling oil prices, notable victims to the US dollar’s surge were NOK and BRL while the Indian rupee was a standout currency in the green. Markets attention remains on the US dollar with the coveted Nonfarm Payroll labour market release at 13:30 BST. Investors will be keeping a close eye on the overall unemployment rate, which remains at historical lows, and average hourly earnings growth as a source of inflationary pressure for a late-cycle US economy. Should the US labour market continue to tighten, at a pace above expectations too, the dollar rally may not be over as the prospects of a rate cut by the Federal Reserve falls.

CAD

The loonie was on the back foot yesterday, as the US dollar once again began to build momentum and crude oil prices took another big step down. Fears over oil contamination in one of Russia’s major pipelines proved short-lived as the 5,500km long pipe re-opened for business yesterday to re-supply central Europe with around 8% of its daily consumption. The loonie did find some stability later in the session yesterday, however, after US Vice President Mike Pence said that he was confident the USMCA trade deal would pass Congress. No headline loonie data will be released today, meaning the focus will be on crude oil and USD in the wake of the US Non-Farm Payrolls report.

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