Dollar Soft Ahead Of ISM Manufacturing And FOMC

The dollar remains soft in quiet holiday trading, ahead of the FOMC rate decision. Another round was selloff in the greenback seen yesterday after the Chicago PMI unexpectedly dropped into contraction territory for the first time in over three years. Recent economic data raised expectations that the Fed could taper its stimulus program. More important economic data will be released by the end of the week, and any more downside surprise would place additional pressure on the greenback. As for today, ISM manufacturing is expected to drop slightly to 51.3 to 51.1 in April. The ADP employment report is expected to show 153k job growth in April, slightly down from March's 158k.

The FOMC meeting today will not be eventful, as policymakers are not expected to change the policy stance amidst domestic and global economic developments. It is possible to have minor changes to the description of economic activity and financial conditions based on incoming data. The Fed would reiterate the targets on expected inflation and unemployment for tapering the stimulus. If the Fed starts reducing monetary stimulus later this year, it would probably give some hints at this meeting. We believe this is unlikely, given weaker growth and benign inflation data received recently. Rather, there might be indications that the Fed would keep buying longer than previously anticipated, increasing the amount of total purchases without changing the monthly pace.

UK PMI manufacturing index is another data focus today, and is expected to show mild improvement from 48.3 to 48.5 in April. Sterling has been solid since the release of a better than expected Q1 GDP report. However, economic outlook remains weak and some more evidence is needed to show that momentum could be sustained in Q2. The EUR/GBP was briefly at 0.84, but has recovered since then. Solid data is needed to give the cross fresh selling to extend the fall from 0.8806.

The euro followed other currencies to go strong against the dollar overnight, and is heading back towards last week's high of 1.3201. Current developments suggest that recent rebound for 1.2746 is still in progress, and would likely extend higher in the near term. Yesterday's weak CPI data triggered just a brief retreat in the EUR/USD, suggesting the rate cut tomorrow is well priced in already.
Elsewhere, China manufacturing PMI dropped to 50.6 in April down from March's 50.9 and below expectation of 50.7, but the markets have shown little reaction.