Fed holds fire

4 May, 2017

Our prop desk has successfully closed out a pair of long GBP/AUD trades in the last 24 hours, whilst a short gold position we saw opened late yesterday morning is currently yielding a healthy return, too, although the precious metal has proved to be something of a challenge in recent days.

Markets have the potential to be stuck in something of a holding pattern for the next 24 hours as we await the non-farm payrolls and wage growth data from the US. We do have some comparatively low-level economic releases on the cards today, but a clearer signal over just how quickly US economic growth will pick up pace seems to be the critical factor. Geopolitical tensions also continue to overshadow sentiment and could serve to drive risk-off trades if we see further escalation.

There were no surprises in the Federal Reserve’s decision last night to hold fire over further policy tightening but despite slowing economic growth, the line from Washington was a transitory phase and the market should still consider the June meeting as ‘live’. The ADP payroll print also impressed yesterday, helping bolster the greenback against a number of major currencies but with Friday’s non-farms – and perhaps more importantly the wage growth data – looming, there’s a real chance that continuing this momentum will be something of a challenge. Watch for US Durable Goods order data at 2pm GMT today as this could provide some direction in the short term.

Last night saw the final televised debate between the two French presidential run-off candidates and it appears that the front runner Macron came across once again as the more convincing candidate. It’s still an open race, especially given the high percentage of undecided voters, but it seems increasingly likely that Le Pen will lose and this is something that stands to give the Euro a notable boost at the start of next week. We could see some risk mitigation ahead of the weekend break, although if there are no real signs of the Macron’s lead being eroded then even this may be deemed unnecessary. 

Last night saw a surprisingly hawkish statement from the RBA Governor Philip Lowe, who cited concerns of spiralling house prices – and the accompanying debt - as posing a threat to the economy. With Australian new home sales data slated for release at 1am GMT tomorrow, this could add further weight to the idea that some element of policy tightening may be necessary in a bid to cool the market, although with exports struggling and more lacklustre PMI data coming out of China, there would presumably be pressure to see this stop short of a rate hike in the short term. The Governor was however keen to stress that rates won’t stay this low indefinitely.

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