Fed’s Stance In Focus

With the Fed’s stance being subject to close scrutiny in the recent past, the outcome of today’s FOMC meeting will remain a key highlight for seeking clarity over future monetary policy. A dovish tone to the policy statement cannot be ruled out, given the recent dismal macroeconomic landscape. With little on the European calendar today, manufacturing and ADP employment data from the US will have the potential to alter risk sentiment. Though still in the contraction phase, signs of green shoots in the parched UK manufacturing PMI landscape should keep the upward momentum in Sterling intact in today’s trading session.

Pound Sterling – UK Markets

The Pound garnered traction against its peers and breached the 1.55 mark against the US Dollar in yesterday’s trading session, amid speculation that the Fed will continue with its accommodative monetary stance for a prolonged period. On the domestic front, PMI data just released has revealed a more than expected improvement in manufacturing activity and has led the Pound to nudge closer to the 1.56 mark against the US Dollar. Meanwhile, yesterday’s data indicated that mortgage approvals rose more than anticipated for March, buoyed by the BoE’s FLS scheme. Moreover, the Nationwide report released today indicated that annual house prices in the UK ticked higher for April, further providing evidence that the nation’s housing activity is gaining momentum. Against this backdrop, tomorrow’s construction PMI data, ahead of the all important services PMI on Thursday, will be closely scrutinised for further insights into the nation’s economic recovery. In the absence of major economic releases in the UK today, news flow emanating from the US is expected to have a profound influence on the direction of currency markets.

US Dollar – US Markets

The US Dollar nudged lower against its peers yesterday, as traders await the outcome of the Fed’s monetary policy meeting later today. Although no shift in policy measures is foreseen, there is growing speculation that the recent spate of weak economic data in the US could prompt policymakers to adopt a dovish stance and thereby keep stimulus measures intact for longer than expected. In spite of prevalent gloom surrounding the US economy, a sharp spike in consumer confidence for April that perhaps signals a recovery in the labour market, is an encouraging sign that the economy is healing. Clearer trends from the labour market are likely to emerge from today’s ADP employment data. Meanwhile, the Chicago PMI contracted unexpectedly in April, dropping to the lowest level in over three years. Against this backdrop, the ISM manufacturing indicator, due for release later today, could surprise market participants on the downside. Going forward in the week, the all important labour market report from the US and the ECB’s monetary policy decision are likely to have a bearing on the greenback in the near term.

Euro – European Markets

Despite the Eurozone unemployment report failing to provide any positive surprises, the single currency nudged higher and crossed the 1.30 mark against the US Dollar yesterday, as traders flocked to high yield currencies amid speculation that the Fed would not rush to dismantle its aggressive easing stance in its policy meeting later today. Yesterday’s unemployment and consumer price inflation data in the Eurozone has cast doubt over the efficacy of the ECB’s easing measures and strengthened expectations of an interest rate cut by the ECB in its monetary policy meeting tomorrow. Meanwhile, in a major development, Cyprus escaped further economic collapse yesterday as the nation’s Parliament approved an EU bailout by a thin majority. However, worries in peripheral economies refuse to abate, as Moody’s demoted Slovenia’s government bond rating further into junk category. On account of a relatively quiet domestic economic calendar today, the single currency is expected to monitor events unfolding on the other side of the Atlantic for further cues to risk appetite.

Other Currencies – Highlights

The Australian Dollar strengthened against its US counterpart in yesterday’s trading session, as risk appetite among investors improved amid hopes that the Fed will not alter its pace of bond purchases in its meeting today. However, gains in the Aussie Dollar remained capped this morning after manufacturing activity plunged to a four year low for April, as strength in the nation’s currency weighed on exporters. Moreover, China’s official manufacturing PMI confirmed a slowdown in activity. For further hints, services PMI due tomorrow will grab focus for clarity on Australia’s economic recovery. Against the backdrop of today’s robust new home sales data in Australia, building approvals data due tomorrow is also likely to garner market attention. In today’ trading session, the outcome of the US Fed’s monetary policy meeting is likely to have a bearing on risk appetite.