Trading activity was light ahead of the FOMC announcement this morning. Economic data had little impact on the market. The US ISM non-manufacturing composite was better than the market expected, but the USD had already main some modest gains ahead of that release and there was no further push higher. Euro area GDP growth of 0.5% q/q in Q1 was in line, confirming the robust growth picture in the region.
The FOMC Statement was line with expectations with only minor tweaks to the wording of the previous statement. Of note the “…committee views the slowing in growth during the first quarter as likely to be transitory.” It also notes that job gains were solid “on average” over recent months, so is happy to treat the soft payrolls figure in March as an aberration. Further, the committee acknowledged the soft CPI outturn for March and left it at that. Overall, the statement leaves the impression that nothing significant has really changed and the path of gradual tightening remains in play. That was certainly the message of Fed members in the weeks leading up to today.
The USD and US rates were slightly higher after the Statement, with nothing to change the consensus view that the Fed is likely to hike again next month, subject to the dataflow over the next six weeks. For the full trading day, the USD major currency TWI is up 0.3%, with broadly-based, albeit modest, gains.
The NZD trades this morning close to its lows for the session around 0.6880, seeing a kick lower following the FOMC statement. It had traded as high as 0.6969 yesterday in response to NZ labour market data showing strong employment growth and the unemployment rate falling back down to its low for the cycle of 4.9%. However, wage inflation remained soft and gives the RBNZ some breathing space before needing to signal any likely policy tightening ahead. So the NZD gains eventually faded and some further weakness followed as it was dragged down by a weaker AUD.
The AUD was the weakest performer by far on no fresh news ahead of the FOMC announcement and has made further losses since. It sits a chunky 1.4% lower for the session at 0.7430. This takes NZD/AUD back up to 0.9260, recovering some of the (unjustified) weakness of previous sessions. The spillover effect from the weaker AUD also sees the NZD down on all the other crosses.
UK and EU tensions have risen ahead of Brexit negotiations, with reports that the UK exit bill might now be closer to €100bn than €60bn, reports that PM May will be prevented from joining discussions at future EU heads of state meetings, and PM May accusing “some in Brussels” of deliberately trying to influence the upcoming UK election. We could go on, but you get the message. While this has caused a bit of intraday volatility in GBP, it has only slightly underperformed the EUR. The fall to 1.2890 is more a reflection of USD strength. EUR fell to around 1.09 this morning post-FOMC.
USD/JPY has continued its rising trend, up through 112.60, supported by a modest lift in US Treasury yields.
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