FOMC Chairman Powell Rescues Dollar, Attention Shifts to BoE
What’s been happening?
Pound Sterling – UK Markets
The British pound continued to gather strength against the euro on the back of some positive Brexit-related development but struggled to stay resilient vs the dollar on Wednesday. The data published by the Bank of England on Wednesday showed that the total consumer credit in April was £0.549 billion while mortgage approvals came in at 62.341K to fall short of the market expectation. Additionally, the IHS Markit’s Manufacturing PMI in the same period dropped to 53.1 from 55.1 in March and came in line with market expectations. “The upturn in the UK manufacturing sector eased at the start of the second quarter. Growth of output and new orders slowed, leading to job cuts for the third time in the past four months,” Rob Dobson, Director at the IHS Markit, said. “There were also reports of overseas clients acting now to re-route their supply chains away from the UK in advance of Brexit.
Earlier in the day, the spokesman for the opposition Labour party said that there was clear evidence that the government was willing to explore shifts in its position on Brexit. Meanwhile, Prime Minister Theresa May’s spokesman told reporters that they wanted to see further progress in cross-party talks. Later in the evening, Theresa May told the Liaison Committee that she was reluctant to give a deadline for a Brexit deal.
US Dollar – US Markets
The dollar remained under selling pressure on Wednesday amid disappointing data releases and the Fed’s cautious tone in its monetary policy statement. Although the first data of the day from the U.S. revealed that the private sector employment increased by 275,000 in April to beat the market expectation of 180,000 by a wide margin, the dismal ISM Manufacturing PMI, which slumped to 52.8 from 55.3, weighed on the currency. On the other hand, the IHS Markit's Manufacturing PMI improved slightly to 52.6 from 52.4.
As expected, the FOMC announced that it kept its policy rate unchanged in April while keeping the policy statement virtually unchanged when compared to March’s statement. "Information received since March indicates economic activity has risen at a solid rate,” the FOMC said. “The Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate.”
However, FOMC Chairman Powell adopted an optimistic tone during the press conference and helped the greenback stage a decisive rebound in the evening. Powell dismissed the recent softness in inflation by saying that it was due to temporary factors and added that they were expecting to see healthy GDP growth in the remainder of the year. Regarding the policy outlook, Powell said that they were not observing a strong case for a policy move in either direction. Following a drop to its lowest level in two weeks, the US Dollar Index, which tracks the dollar’s value against a basket of six major currencies, closed the day in the positive territory.
Euro – European Markets
The euro posted losses against both the dollar and the pound sterling on Wednesday as the lack of macroeconomic data releases from the euro area amid the Labour Day holiday made it difficult for the currency to find demand.
While speaking at an event in London, European Central Bank (ECB) Vice President Luis de Guindos said that the low-interest rate environment would remain for the foreseeable future and added the low profitability of the euro area banking sector was a concern the for financial stability and for the monetary policy.
What’s coming up?
UK: The Bank of England will announce its interest rate decision and publish the monetary policy statement. At 11 GMT, Bank of England Governor Mark Carney will be delivering his remarks on the monetary policy outlook.
US: Weekly jobless claims, nonfarm productivity, and the ISM-NY’s Business Conditions Index will be featured in the U.S. economic docket on Thursday.
EU: The IHS Markit will publish the Manufacturing PMI report for the eurozone and Germany. Destatis will release retails sales figures for Germany as well.