GBP advances, USD retreats ahead of FOMC

The G10 rundown

USD – the USD rally is no more and would require a strong reaction to the remainder of this week’s event risks to re-engage. The question for tonight’s FOMC is whether the market has overreached in pricing a further dovish shift from the Fed. The bar is lowest for a hawkish surprise, but “less dovish than expected” is about as hawkish as we may get.

EUR – speculative market not set up for supportive data like we saw yesterday. Next step is the EU CPI data up on Friday and the final Manufacturing PMI’s tomorrow and Services PMI’s on Monday.

JPY – the yen will not likely seize the spotlight unless risk sentiment fails and bonds rally hard simultaneously, or if bonds were to sell-off heavily. The combination of dovish expectations from the Fed and risk-on makes for a muddle through. 

GBP – sterling is resurgent across the board on no real developments of note. Theresa May is sending signals that she hopes to wind up talks with the Labour opposition next week. The GBPCHF move and GBPUSD moves yesterday were the most noteworthy, particularly GBPUSD slicing back up through 1.3000, a technical reversal that turns the tables on the chart and favours the upside from here if 1.3000 can hold.

CHF – the positive Euro data yesterday and strong risk sentiment backdrop have EURCHF suddenly threatening the highs of the recent rally. The melt-up scenario and stable-to improving EU data could drive a further rally – 1.1500 is the important nut to crack in EURCHF on that account.

AUD – the Reserve Bank of Australia meets next Tuesday and rate cut odds are near 50/50 – so a decisive meeting one way or the other. We prefer finding ways to short AUD, for example, AUDCAD shorts and EURAUD longs if the RBA cuts. 

CAD – the Feb. Canada GDP data came in weak, but the Bank of Canada’s Poloz expressed hope that there was a pick up in investment growth in Q1 and that there is good reason to hope for a growth pick up in H2. USDCAD suffered a steep retreat, neutralizing the recent rally.

NZD – the Q1 NZ employment and earnings data overnight rather confusing to interpret as the unemployment rate dropped even as employment change was negative – all due to a huge drop in the participation rate. Earnings also confused, with slower growth in wages than expected while the average hourly earnings were higher – so people are getting paid more per hour but working fewer hours than expected? Let’s call it a mildly negative surprise that adds to our long AUDNZD argument, even if the RBA next week could prove a tactical downside risk next week.

SEK – a recent Swedish data point we neglected to highlight was the Household Lending data, which showed a further steep drop to a growth rate of 5% year-on-year. Without a strong growth impulse from exports, this points to weaker growth and risks for SEK.

NOK – EURNOK in limbo, but has arguably neutralized the prior downtrend and could be vulnerable to a further squeeze if oil prices. The remarkable widening of rate spreads in Norway’s favour has done less good for the krone than we would have thought.

Upcoming Economic Calendar Highlights (all times GMT)

0830 – UK Mar. Mortgage Approvals

0830 – UK Apr. Manufacturing PMI

1215 – US Apr. ADP Employment Change

1400 – US Apr. ISM Manufacturing

1800 – US FOMC Rate Decision

1830 – US Fed Chairman Powell Press Conference

2015 – Canada Bank of Canada’ Poloz and Wilkins to speak