The FOMC and the USD in Focus, with One Eye on the EUR

The biggest story of the morning will be Moody’s decision to downgrade China’s sovereign rating, the country’s first downgrade since 1989.

The downgrade led to the China markets falling deeply into the red before recovering, market risk appetite seemingly unwavering at the time of the report with gold in the red and the Yen on the back foot, whilst the CSI300 recovered from heavier losses following the downgrade.

China’s debt has been a concern for some time and the Chinese government and PBoC have been trying to address the issue, with overcapacity lingering in the manufacturing sector most heavily laden with debt. The reality is however that debt has continued to grow.

While the equity markets may be able to take the downgrade in their stride, Chinese companies may soon face an altogether different problem, the sovereign downgrade likely to lead to an increase in borrowing costs for foreign loans, which may well have an impact on output, particularly if the Yuan weakens further as a result of the downgrade, adding to funding costs.

It’s too early for a market panic and concerns for now are likely to continue to ease, with the global economic outlook and demand for Chinese goods expected to remain strong over the near-term.

As the European markets open this morning, it’s red across the board for the major indexes however, as the markets consider the downgrade and look ahead to the FOMC meeting minutes, while the Dollar continues to enjoy its road to recovery with the Dollar Spot Index up 0.07% at 97.42, at the time of the report, though it’s certainly not one direction, as continued concerns over what Trump will face upon returning to Capitol Hill something the markets will need to be conscious of.

For the day ahead, the Dollar will be in the limelight once more, though this time around it will be monetary policy in focus, with the FED’s monetary policy meeting minutes scheduled for release.

We have heard from a number of FOMC members this week, with voting members Kaplan and Harker continuing to support two further rate hikes over the year, while perhaps the most dovish of the voting members and newest addition Kashkari, raising concerns over the outlook on inflation.

Expectations are for the minutes to be on the hawkish side, which is justified following the FOMC Statement released earlier in the month, the political noise from Capitol Hill having been at a lower volume at the time of the FOMC meeting. We have seen the probability of a June rate hike recover, despite economic data out of the U.S continuing to send mixed signals following the 1^st quarter weakness.

In addition to the outlook on interest rates, of more interest will be discussions on the selling down of the FED’s balance sheet, commentary from FOMC members having been mixed in recent weeks on the size of the sell-down and timing.

Ahead of the release of the FOMC meeting minutes, ECB President Draghi is scheduled to speak in the early afternoon, which will bring the EUR into focus, the improved consumer climate figures out of Germany released earlier in the day giving little upside to the EUR, as the markets get ready for another attempt to drag on the EUR, should Draghi decide to retort Merkel’s comments from earlier in the week or peg back recent gains in the EUR. There could be a curveball however, with economic data out of the Eurozone continuing to show growth in the private sector as geopolitical risk falls away as elections come and go.

Outside of noise from Central bankers, April’s U.S existing home sales will provide the U.S Dollar with some direction ahead of the release of the minutes, with sales forecasted to be on the slide adding to the tumble in new home sales for the same month, which could raise questions on whether inventories are beginning to build amidst easing demand, the housing sector having been a particularly important barometer on consumer sentiment and labour market conditions in recent years.

The EUR will likely struggle for direction ahead of Draghi’s speech this afternoon, the EUR currently down 0.06% at $1.11768, with the expectations high for the Dollar to get a boost off the back of the FOMC meeting minutes.