Powell sees no pressure for a hike or a cut

Yesterday’s meeting of the rate-setting FOMC gave very little to the market by way of any clues on the next move in short-term interest rates.

Traders have swung from slightly bearish on the economy to slightly bullish and back again. Jerome Powell, the Fed Chairman, was in no mood to influence trader’s thinking by saying that he considered the factors holding inflation back as “transitory” and he saw no reason for a rate move in either direction. This left the market rather non-plussed, not being used to a “fence sitter” at the top of the Fed.

The dollar index traded down as low as 97.14 before bouncing to a high of 97.61.

Before Powell’s comment, the dollar had been hit by a surprisingly weak number for manufacturing activity. The ISM PMI fell from 55.3 in March to 52.8 in April completely offsetting far stronger than expected data for private sector jobs.

Tomorrow’s NFP report will provide further guidance to the market with Powell’s comments a clear message to the market to study the data and not rely on “freebies” from the Central Bank. The Fed Chair is basically saying to the market, “you are seeing the same data as us, make your own mind up.”

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Sterling lifted by Brexit hopes

The pound bucked the trend towards a stronger dollar yesterday rallying for the thinnest of reasons as rumours spread that the Government and the main opposition party were getting closer to deal, if not an agreement on Brexit.

There has been nothing tangible to cause the rumours and the Prime Minister became involved in a different issue yesterday dismissing her Defence Secretary over leaked information on the Governments dealings with Chinese tech giant Huawei and the 5G network. Gavin Williamson denied being the source of the leak before his dismissal and remains strenuous in his denial of involvement. Mrs May, however, says she sees no other credible explanation.

Williamson was one of Mrs May’s staunchest supporters in Cabinet and as has been the case in British politics for almost three years, “all roads lead to Brexit”.

With Cabinet departures becoming commonplace, the effect on Sterling was negligible and the pound rallied to a high of 1.3103 although it lost most of that gain following the FOMC, closing at 1.3049.

Today’s MPC meeting is expected to be something of a non-event as in keeping with just about the entire fabric of the country a solution to the Brexit conundrum holds back any action on the economy. The Bank of England is “keeping its powder dry”, fearing a no deal departure but clearly hoping MPs finally approve May’s plan.

The market will listen to what Governor Carney has to say but with the Brexit delay, he has become something of a lame duck, the extension to his departure from the role something of a waste of time and money.

Data to provide further clues on Eurozone recovery

Having seen that the Eurozone economy performed a little better than the market anticipated in Q1, although it could hardly have performed worse, traders get to see what expectation for future activity looks like as the Markit PMI reports for France, Germany and Italy individually, and the region as a whole is released.

Market expectation is mostly unchanged from March, although there could be a slight increase in the Italian outlook in keeping with its slightly improved GDP figure.

The overriding sense of economic activity in the entire Eurozone is that it is bottoming out although the hope is that that bottoming out isn’t actually the region “flatlining”.

It is probable that traders will defer judgement and allow the benefit of the doubt and accept that the current quarter will again show marginal growth before the economy starts to pick up again in H2.

It is fortuitous that next week’s ECB meeting is a non-monetary policy gathering although there will still be an expectation that Sr. Draghi will at least make some comments on the economy and the prospect for a recovery in both growth and inflation.

The single currency performed its newly found role as the dollar’s counterbalance yesterday, reaching a high of 1.1265, before falling back in a mirror image of the dollar index to close at 1.1194.

Following the release of this morning’s data, the market is likely to drift s traders await tomorrow’s U.S. employment data and the Eurozone inflation report.