The FOMC, Trump and U.S Stats to Drive the Dollar

Earlier in the Day:

Macroeconomic data through the Asian session this morning provided some much needed respite for the Kiwi Dollar, with New Zealand’s unemployment rate falling to 4.6% in the 3^rd quarter, after a 1.1% increase in payrolls through the quarter. It was the first bit of good news for some time, with the Kiwi Dollar moving from $0.68382 to $0.6885 upon release of the numbers, before making further gains, up 0.82% at $0.6903 at the time of writing.

While the numbers are positive, with expectations that the RBNZ is to increase its focus on employment numbers, the uptick is unlikely to deliver a material shift in sentiment towards RBNZ monetary policy, with economic indicators having raised the prospect of further rate cuts in recent weeks.

For the region, following the disappointing government PMI numbers out of China on Tuesday, this morning’s Markit survey numbers showed that manufacturing output held steady in October, with the PMI unchanged from the previous month easing some of the negativity towards the economic outlook. Asian equities were largely positive through the session, with the figures supporting risk appetite following the gains in the U.S on Tuesday.

For the Aussie Dollar, this morning’s disappointing manufacturing figures had little impact, the AIG Index falling from 54.2 to 51.0 in October. Interest was likely to be more focused on the figures out of China, whilst the markets also look ahead to tomorrow’s trade data and retail sales figures due out on Friday.

At the time of writing, the Aussie Dollar was up 0.04% at $0.7659, though whether it can hold on to $0.76 levels by the end of the week remains to be seen.

The Day Ahead:

With a lack of macroeconomic data out of the Eurozone this morning, the EUR will be at the mercy of the Dollar through the day, October’s prelim inflation figures out of the Eurozone on Tuesday having done enough to peg back an upward moves off the back of the upbeat GDP numbers for the 3^rd quarter.

At the time of writing the EUR was down 0.15% at $1.1629 and the ECB must be patting themselves on the back for a job well done in holding back EUR strength whilst delivering the markets with the much talked about tapering. It could go horrible wrong should the Dollar take a dive, with plenty of possible Dollar negatives lingering, including the Mueller investigations.

Out of the UK, October manufacturing PMI figures are scheduled for release this morning, which are forecasted to be Sterling positive ahead of tomorrow’s BoE monetary policy decision, with the Pound having rallied through Tuesday off the back of positive news on Brexit which, barring a hawkish BoE, will likely remain the key driver for the Pound through the coming months.

There’s been plenty of debate over how the Pound will respond tomorrow, with a one-off dovish hike by the BoE or even a hold on rates being considered the two negatives, any material upside needing the BoE to signal a shift in the outlook for rates beyond this week’s decision.

For Governor Carney, inflation remains the bugbear and a one-off dovish hike may not be enough to deliver strength in the Pound so, supported by the upbeat GDP numbers for the 3^rd quarter, while the Sterling bears appear to be out in force, the surprise could be a higher vote count in favour of a move and an announcement of further rate hikes ahead.

Upbeat data today would support a more hawkish move tomorrow, though the uncertainty over what lies ahead tomorrow will likely be evident.

The Pound was down 0.06% to $1.3275, with the Sterling bears having been caught out on Tuesday by the unpredictability of noise from the EU and British Government over progress on Brexit.

Across the Pond, it’s another big day for the Dollar, with key stats out of the U.S including October’s ADP nonfarm employment change figures together with manufacturing PMI numbers all of which rolls out before the FOMC’s monetary policy decision and release of the FOMC Statement.

If Chicago’s October PMI is anything to go by, the market’s preferred ISM manufacturing sector survey figures could provide further support for the Dollar, with the ADP numbers expected to reflect a recovery in hiring following Hurricanes Harvey and Irma in September. Whilst we would usually expect market sensitivity to the previous month figures, the markets are likely to brush aside any downward revisions to September numbers this time around.

For the FOMC, whilst it’s as much of a sure thing as the markets can get that the FED will hold rates unchanged later today, they key driver will be the forward guidance within the FOMC Statement, with the markets looking for a December green light.

Inflation continues to be the dominant topic amongst Committee members, with clear divisions between the doves and the hawks. In the last FOMC, we had seen three camps emerge, the doves, the undecided and the hawks. The undecided looking for data before deciding whether to favour a rate hike or move alongside the doves. The data has certainly been impressive, so for those whose decision is to be reliant upon data, barring an economic catastrophe, the statement should be aligned with the market’s pricing in of a December hike.

With economic data and FOMC Statements to consider, debate over who will be the next FED Chair will also be a factor, as will the ongoing investigations into the U.S administration, with lead investigator Mueller capable of dropping a bombshell at any time. And then there will be likely tax reform chatter. With there being talk of a tax reform bill being rolled out today, the big question being whether it’s going to be phased in or not…

At the time of writing, the Dollar Spot Index was up 0.17% at 94.711, as the Dollar continues to claw back its losses since the start of the year. The Dollar could see a sharp correction should the FOMC statement fail to convince the markets of a December move and things could get worse should the prospects of tax reforms being phased in become all the more likely.