All Eyes on the Fed

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Market Drivers February 1, 2017
UK PMI in line but cable takes out 1.2600
New Zealand data misses
Nikkei 0.50% Dax 0.94%
Oil $52/bbl
Gold $1212/oz.

Europe and Asia:
NZD Unemployment 5.2% vs. 4.8%
EUR EZ Final PMI 55.2 vs. 55.1
GBP UK PMI Manufacturing 55.9 vs. 55.9

North America:
USD ADP 8:15
USD ISM Manufacturing 10:00
USD FOMC 14:00

After yesterday’s, wild and volatile action, trading in the FX market was decidedly more subdued in Asian and morning London trade today, as markets awaited a slew of US data including the FOMC rate decision.

In Asian session dealing commodity dollars came under some pressure with kiwi dropping more than 70 points off the session highs after New Zealand labor data missed its mark. Unemployment rose to 5.2% from 4.8% and more importantly wage growth was tepid at 0.4% versus 0.5% eyed. Still labor force participation rose, suggesting that final demand remains robust and that the economy is growing at a decent pace. Most analysts expect the RBNZ to remain neutral for the rest of the year, keeping rates at the 1.75% level.

In UK the PMI Manufacturing came in inline with forecasts at 55.9. According to Markit, “The UK manufacturing sector made a strong start to 2017. Output rose at the fastest rate since May 2014, as new order intakes expanded at a robust pace. Price pressures intensified, however, as input cost inflation surged to a survey record high and output charges also increased at one of the steepest rates in the series history.” Cable rose through the 1.2600 figure and remained bid during London morning trade as traders remained buoyant about the state of the UK economy.

In US today the calendar is very busy with three key reports out throughout the day. The market will first get a look at the ADP report which is forecast to print at 165K versus 153K prior. Next the ISM Manufacturing is due with projections of 55 versus 54.5 and finally we’ll get the FOMC statement. The market expects no change from FOMC but any dovish tilt in the tone could send the dollar tumbling down.

Although consensus is officially calling for 2 rate hikes in 2017, the dollar has been priced for a 3 rate hike cycle in 2017. If the Fed appears at all reluctant to tighten policy the buck is likely to see strong profit taking selloff with USD/JPY possibly testing 112.00 figure on any hint of a hold.

Boris Schlossberg
Managing Director

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