As the Federal Reserve begins its two-day meeting that culminates in a policy decision tomorrow afternoon, the United States Dollar has reversed yesterday’s losses and is trading in positive territory across the G10.
Overview
Yesterday’s price action was dominated by speculation on USDJPY, and the Dollar lost close to half a percent on the Bloomberg Dollar Spot Index, but the focus has shifted this morning back to domestic events. Generally speaking, markets have begun to expect somewhat of a hawkish pivot in tone from Fed Chair Jerome Powell, though no concrete policy changes are expected just yet. After the flash reading of April, CPI came in hotter than expected, and GDP for Q1 shot lower. It seems a new ‘economic reality’ may be on the horizon for the US, and the much-anticipated global recovery is not quite as strong as many had hoped.
This morning’s data print on employment cost from the US provided even further evidence that the first quarter’s hot inflation readings are not the so-called flash in the pan that the Fed and the larger economy hoped they were. In the first quarter of this year, employment costs in the US grew 1.2%, higher than the flat 1% growth market consensus reading. It’s no surprise that the domestic job market is still tight, given the hot payroll data for the first three months of this year, but a cost figure that comes in above expectations is still not what markets want to see. Typically, we’d expect muted movements across the board on a relatively small upside surprise such as this one, but month-end demands for USD are also contributing to choppy price action, and volatility continues to stay high.
What to Watch Today…
- FOMC Policy Decision, Wednesday 2 PM
- US Nonfarm Payrolls, Friday 8:30 AM
- Monex USA Online is always open.
EUR ⇓
Though still trading in familiar ranges, the single currency has given up a touch of ground against USD this morning even after the Eurozone’s GDP data showed the region’s economy grew more than expected in the first quarter of this year. Also released this morning, inflation data showed CPI only slowed slightly, to 2.7%, versus expectations of 2.6%. Voting members of the European Central Bank seem to have – finally – consolidated their views to target a first interest rate cut in June, clearly before the Fed is likely to move, but the ECB’s July meeting remains hotly contested.
JPY ⇓
Japanese Yen’s roller coaster ride continues, sliding 0.7% weaker this morning after Monday’s wild ride of strength. According to CME Group, Monday was the busiest day for Japanese Yen spot trading since November 2016, with more than $77 billion traded in the USDJPY pair. The Bank of Japan’s accounts did suggest that authorities purchased roughly 5.5 trillion Yen to prop up the currency Sunday night and into Monday, though no official confirmation is likely to hit the wires for some time. Whether JPY can hold onto any of Monday’s gains at all through the Fed decision tomorrow remains to be seen.
