Inflation and FOMC Minutes to Drive the GBP and USD

Earlier in the Day:

Key economic data released through the Asian session this morning was limited to 1^st quarter construction work figures out of Australia and prelim May manufacturing PMI numbers out of Japan.

For the Japanese Yen, the Manufacturing PMI stood at 52.5 in May, according to prelim figures, falling short of a forecasted 53.6, with the pace of expansion slowing from April’s 53.8.

Following a disappointing first quarter for the Japanese economy, the latest PMI numbers will have provided little comfort, with new order growth easing to a 9-month low and backlogs rising at a slower pace, leading to an easing in the pace of hiring. On the positive side, new export orders saw a pickup in pace, supported by the weaker Japanese Yen, with wholesale price inflation also accelerating.

The Japanese Yen moved from ¥110.815 to $110.856 against the Dollar, upon release of the figures, before rising to ¥110.49 at the time of writing, up 0.37% for the session, appetite for the Yen on the rise through the session, as geo-political risk weighed on market risk appetite.

For the Aussie Dollar, 1^st quarter construction rose by 0.2%, quarter-on-quarter, supported by a 1.5% rise in engineering work done and 0.4% rise in residential work done. Building and non-residential work done fell in the 1^st quarter, with non-residential work done falling by 2.6%.

The Aussie Dollar moved from $0.75769 to $0.75611 upon release of the figures, before moving to $0.7555 at the time of writing, down 0.28% for the session, risk off sentiment through the morning weighing.

In the equity markets, it was a sea of red early in the day, with the Nikkei sliding 1.2% off the back of disappointing PMI numbers, a stronger Yen, Trump’s discontent over U.S – China trade talks and concerns over the prospects of a North Korean Summit with the U.S. The Hang Seng and CSI300 were down 0.98% and 0.78% respectively. For the ASX200, it could be a 5^th consecutive day in the red, down 0.09% at the time of writing, the shift in sentiment seeing the index cough up gains from the start of the day.

The Day Ahead:

For the EUR, after a particularly quiet start to the week, May’s prelim private sector PMI numbers out of France, Germany and the Eurozone will provide direction, focus likely to be on wholesale inflation numbers and new orders and Germany’s numbers in particular, following the soft 1^st quarter growth figures released last week. Nonfarm payroll figures out of France ahead of the PMI numbers will likely have a muted impact.

On the data front, PMI forecasts are for a further softening that would be a negative for the EUR, with the Italian coalition government and general sentiment towards the Eurozone economy and outlook for policy also negatives mid-way through the 2^nd quarter.

At the time of writing, the EUR down 0.15% to $1.1761, geo-politics and today’s stats the key drivers ahead of tomorrow’s release of the ECB’s monetary policy meeting minutes.

For the Pound, it’s a big day, with April’s inflation figures scheduled for release this morning, together with house price figures that will likely be ignored. March’s figures had contributed to a material shift in sentiment towards monetary policy in the run up to the May policy meeting, giving today’s figures particular relevance ahead of tomorrow’s retail sales figures.

In line with or better than forecasted figures should be a positive for the Pound, with the annual rate of inflation forecasted to hold steady at 2.5%, supported by a 0.5% rise in consumer prices, month-on-month, with producer input prices also forecasted to jump by 1% in April.

At the time of writing, the Pound was down 0.15% to $1.3412, with today’s stats and sentiment towards tomorrow’s retail sales figures taking centre stage.

Across the Pond, it’s also a big day for the Greenback, April’s prelim private sector PMI numbers scheduled for release, together with April new home sales figures, with the release of the FOMC meeting minutes later in the day the key driver for the Dollar today.

There’s been plenty of debate over how the FED has interpreted the recent improvement in economic indicators and rise in inflationary pressures, with FOMC members having contrasting views on whether the FED should or needs to take a more aggressive rate path through the remainder of the year.

While the markets will need to wait for next month to reassess the median forecasts, a green light for a June rate hike will be a must for the chance of a 4^th rate hike for the year to remain priced in. Anything dovish and there’s a lot of ground for the Dollar to give up in response.

Ahead of the minutes, prelim manufacturing and service sector PMI numbers out will provide some direction, with service sector numbers needing to continue impressing to support a pickup in economic growth in the 2^nd quarter.

At the time of writing, the Dollar Spot Index was up 0.08% to 93.682, direction through the day coming from today’s stats and FOMC minutes, with the Oval Office always in the picture.

For the Loonie, there’s no action today on the data front, with the risk off sentiment and pullback in crude oil prices weighing early in the day, the Loonie down 0.24% to C$1.285 against the Greenback, though NAFTA talks could deliver for the Loonie at any time.