FOMC Sets the Tone for June Hike

Yellen content with growth picture

Despite a mixed bag of data in the first quarter, culminating in a far weaker than expected employment report for March, the Federal Reserve is on course to hike rates in June. In what would be the third hike this year the FOMC is in danger of “going from 0-60” in record time. During the financial crisis in 2008, there were seven rate cuts. That followed three cuts in Q4 ’07.

The dollar reacted positively to the likelihood of a June hike making a six-week high against the Jpy as risk appetite was heightened. Janet Yellen cited strong consumer activity, business spending and inflation running “close to target” as reasons for continued optimism in the economy.

The Euro and Pound were also off their recent highs in reaction to a stronger dollar. The single currency fell to a low of 1.0880 before recovering a little to re-test 1.0900. Sterling tested support close to 1.2870 before also recovering a little. The dollar index failed to breach 99.50 before settling back into the 99.20/40 range.

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Macron wins TV debate

In a sometimes-heated debate, Emmanuel Macron and Marine Le Pen faced off for their final televised debate last evening. The two candidates traded blows on security, Europe and the economy. At the end of the two hours’ debate, Macron was considered to have been more impressive by a margin of 63% to 37% in a poll of viewers.

With the fate of the EU and the Euro firmly in the hands of the French electorate, Sunday’s run-off will be the most important French election in decades.

Macron labelled Le Pen the “High Priestess of Fear”, while Le Pen decried Macron’s finance background calling him the “Candidate of savage globalization”. Since the two candidates have limited experience of actual Government, France will be faced with a long bedding in period before the winner is able to start to put their stamp on the country and its society.

A Macron victory will be heralded in Brussels despite his calls on the EU to reform. The threat that failure to change will lead to a Frexit referendum is being treated as so much campaign bluster.

May turns on EU for election interference

In a fiery response to “Brussels gossip”, Prime Minister Theresa May heavily criticized the scare mongering of E.U. officials. In response to a rumour that the bill for Brexit has already risen from Eur 65 bio. to Eur 100 bio., May was forthright in her claim that the timing of these leaks was designed to have an influence over the election result.

It seems that Tusk and Juncker are more rattled over the prospect of a “strong and decisive” leadership in the U.K. than over the French election. It has been a characteristic of the French election, and the Dutch one before it, that Brussels has remained tight lipped.

The latest opinion poll puts the Conservatives 19% ahead of Labour but Mrs May has warned of the need for continued vigilance citing what happened last June.

Following stronger than expected manufacturing data earlier in the week, today sees the release of services figures. A slight fall from 55 to 54.5 is expected but with any number above 50 signalling expansion the effect on Sterling should be minimal.

Tomorrow’s U.S. employment report remains the economic “highlight” of the week but it will take a monumental surprise to drive the FX market out of its recent ranges.