USD At Two-Month Low Ahead Of FOMC

The USD is sitting at two-month lows in the lead-up to the Federal Reserve meeting that concludes later today, as traders continue to bet on a maintaining of current monetary policy by the FOMC. Yet another industrial indicator, in this case yesterday’s manufacturing numbers from the Chicago area, sent the USD into a tailspin during the European afternoon.

This is another example of how poor data has successfully destroyed a lot of the chatter surrounding the prospects of the Fed reducing the amount of QE that is being pumped into the economy on a monthly basis, in favour of maintaining or even extending it. May will be a key month for USD, as we find out whether the swoon is a near-term thing or the start of something more chronic. If it turns out to be the latter, then USD could spend a lot of the summer on the back foot.

U.S. Payrolls
Today’s ADP jobs number will be used as an indicator of Friday’s payrolls announcement given last month’s large miss in the latter was foreseen in the former, a few day’s previous. Much like last month the predicted growth figures are within 5k of each other and therefore a miss will see a large USD slide.

The beneficiary of this move lower in USD remains the euro on expectations of great rate differentials between the Fed and ECB. This is despite seeing Eurozone unemployment reach yet another record with 12.1% now without a job. The usual suspects of Austria (4.7%), Germany (5.4%) and Luxembourg (5.7%) came in with the lowest, and the highest was seen in Greece (27.2% in January), Spain (26.7%) and Portugal (17.5%). The youth unemployment measure is all the more disheartening with the entire EU reaching a level of 23.5%.

Euro-zone inflation has also disappointed with CPI dropping to the lowest level in over three years. 1.2%, and 1.4% with energy excluded, are the kind of numbers that must see at least a 25bps cut by the ECB on Thursday. Indeed, we have seen some people now ask for a full 50bps from the ECB. I would love to see that but fear that it won’t happen.

PMI Day
Today is global manufacturing PMI day although some of the lustre has been taken off courtesy of the May Day holiday in Europe. We are still afforded a decent look at the prospects of global manufacturing sector however, and the impact of one country’s monetary policy is having already dire effects on one of its competitors. Korea’s exports rose by a piffling 0.4% in April with economists looking for 2.0%. The importance of this number is found in the reliance on Japan and China as markets for its goods -- if they aren’t buying then manufacturing could easily slow moving forward.

Given the negative contribution that manufacturing made to Q1 GDP here in the UK it is safe to say that this morning’s April PMI number will be closely watched for signs of a recovery. Analysts are looking for a slight slowing in the rate of deterioration which, in terms of sterling, is likely to count as a win.