The lingering spirit of former Federal Reserve President Janet Yellen may have stirred current Fed chair Jerome Powell to use the words “transitory factors” when explaining the unexpected fall in core inflation since December. As this shows the confidence of the Fed that inflation will rebound coming months, which justifies a tighter monetary policy, was the reason USD saw a big jump yesterday during the Federal Open Market Committee press conference. Powell also expressed his faith in consumer consumption and business investment picking up in coming months, despite the recent decrease in economic activities in this sector. Finally, the Fed lowered the Interest Rate On Excess Reserves by 5 basis points but managed to communicate convincingly that this represented more of a technical adjustment than a new direction in monetary policy. This afternoon sees the Preliminary Quarterly Unit Labour Costs and Nonfarm Productivity growth for Q1 at 13:30 BST.
Sterling continues to float along with general G10 sentiment in light of little market-moving news. Yesterday saw the manufacturing Purchasing Manager Index for April released, but the bang on expectations print at 53.1 added little value due to the figure recently being overinflated by stockpiling effects. Meanwhile, in Westminster focus revolved around the Huawei leak and the firing of defence minister Gavin Williamson. That was until the Financial Times broke the story that May is mulling over a potential customs union, which sparked a brief flurry in the pound prior to the Fed announcement. The report comes in light of warnings from chief whip Julian Smith who warned that unless a customs union is struck, and relatively quickly, the likelihood of a Labour second referendum increases dramatically. The move by May to sign up to a customs union, without calling it a customs union, would be in return for Labour backing the Withdrawal Agreement. It is yet to be seen how far cross-party talks have evolved into making this scenario a reality meaning sterling remains cautious breaking to the upside for now. In other news, it is Super Thursday – the day in which the Bank of England releases a fresh quarterly inflation report with its monetary policy decision. However, given their latest Brexit bind and a deteriorating economic backdrop, the event may be less “super” than historical standards. Participants will be honing in on any change to February’s inflation forecasts of 2.22% and 2.29% for 2019 and 2020 respectively. On top of the heavy data calendar, April’s construction PMI will also be released at 09:30 BST.
It was back to square one again for the single currency versus the US dollar yesterday, as the dollar strength during the Federal Open Market Committee meeting erased all gains the euro made earlier on Tuesday. The positive surprise on Tuesday’s Q1 Gross Domestic Product growth and the strong German inflation figures were therefore quickly forgotten as little data of relevance came out for the Eurozone yesterday. Today holds more promise in that respect, with the Final Manufacturing Purchasing Manufacturing Indices for several Eurozone countries being published all throughout the morning.
Early in the Asian trading session, the loonie reached the highest point in a week against USD, however, after the neutral-to-hawkish FOMC press conference the loonie’s faith reversed as the cross shot up again. What undoubtedly didn’t help either was the Manufacturing PMI, which fell rapidly since its zenith mid-2018 and is now hinting at a contraction for the first time since March 2016 with a score of 49.7. The details of the report offered little reason for optimism, with production falling at the fastest rate since December 2015 as it realigned with softer consumer demand, while export sales continued their steady decline. This falls in line with the downbeat tone of the Bank of Canada Business Outlook survey that came out in April, showing this trend may be sustained, lowering chances of a 2019 BoC rate hike even further.