Fed in focus as rate expectations fade

3 May, 2017

Our prop desk has been relatively quiet over the last 24 hours, although we have seen some short interest on the Aussie dollar yielding results. Attempts at bargain hunting on gold and oil have so far proved fruitless, although the accompanying losses are - at least for now - limited.

There’s a relatively busy day ahead covering a myriad of asset classes and largely driven by data from the US. The Federal Reserve’s next call on monetary policy is a clear stand out event on the day, although the expectation here is that the hawkish slant is likely to find itself being toned down. ADP payroll readings also offer a precursor to Friday’s non-farms, whilst again from the US the non-manufacturing PMI reading will also be under scrutiny. US stock valuations may still be soaring, but is this being played out in the wider economy and how much longer can investors continue to back the idea of Donald Trump’s promised tax reform as justification for the never-ending equity rally?

6pm GMT sees the release of the next FOMC policy statement, although with US inflation flagging, there’s no meaningful expectation that we’ll see any indication of tightening today and as always it’s going to be the detail of the narrative that comes under the greatest scrutiny. Getting two more rate hikes through this year is looking increasingly challenging for Janet Yellen, so anything that serves to confirm this has the ability to squash US treasury yields and heap some pressure onto the greenback, too.

Yesterday’s better than expected UK manufacturing PMI reading served to give the pound a lift and allay some of those fears that had been building over the weekend break with regard to the forthcoming general election We now have the corresponding construction PMI print due at 8.30am GMT so another impressive performance here should serve to further bolster GBP crosses. With cable having retaken the 1.2900 handle, it’s the psychologically significant 1.30 that many will be looking to see a test of.

Oil prices have been under pressure of late with fears mounting that Opec won’t extend those production quota cuts, whilst production in North Africa has also been increasing. Today’s weekly oil inventory update could however provide some fresh direction here and with yesterday’s API prints showing bigger than expected falls in stockpiles, the expectation is this pattern will be maintained. Despite yesterday’s volatility, there’s a clear downward trend being displayed for crude – and by some accounts these risks pushing the asset into oversold territory. 

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