Market Drivers May 3, 2017
Brexit Bill may be 100B
GE Employment beats
Nikkei holiday Dax -0.13%
Europe and Asia:
EUR GE Unemployment -15K vs. -12K
GBP UK PMI Construction 53.1 vs. 52
EUR GDP 1.7% vs. 1.7%
USD ADP 8:15
USD ISM Non-Manufacturing 10:00
USD Fed Rate Decision 14:00
The dollar was mildly stronger in early European trade today, rising against most of its major partners in quiet trade. With both Hong Kong and Tokyo out on holiday, the action was generally subdued as traders awaited the key economic releases expected during US session.
Cable took a small swan dive in late Asian dealing on rumors that UK final exit bill from EU may 100 Billion dollars. The main EU negotiator Michel Barnier issued several directives the EU will be seeking including the idea that EU citizens in UK and UK citizens in EU must enjoy same rights based on EU law after Brexit and that Britain must honour its share of all obligations undertaken as a member of the EU and should cover all its liabilities, contingent liabilities, and costs related to moving agencies out of the UK.
The rights of non-UK citizens and UK’s ultimate bill to EU are the prime points of contention and will likely occupy the negotiators for the vast majority of the time. For now, both sides remain far apart and the clearly contentious nature of the Brexit talks could start to weigh on the pound. The pair dipped below the 1.2900 mark in Asian trade rebounded and then dipped towards the 1.2900 figure once again. For now, the 1.3000 barrier looks out of reach and if the Fed statement due later today proves dollar positive the pair could retreat back below the 1.2900 level once again.
The focus in FX today will be squarely on US data. With ADP, ISM Non-Manufacturing and FOMC all on the docket, USDJPY will be the prime candidate for movement as the news is released. So far USDJPY has blissfully ignored lower US yields and weaker US data as the pair climbed to recent swing highs hitting 112.20 in morning London dealing.
The markets remain convinced that any dip in US data is temporary, they appear confident that the Fed will hike rates by 25 basis points in June and they are hopeful that Trump administration will be able to enact some sort of tax reform that will be stimulatory to the economy. As we noted earlier all of those assumptions appear dubious to us. But today will be the day when the first part of the thesis will be tested. With ISM Manufacturing missing its mark by nearly 2 points, chances are that the ISM Non-Manufacturing report may disappoint as well. The Non-Manufacturing report is far more important of the two since services make up more than 70% of the US economy. It is also one of the better forecasters of the NFPs. Therefore if both the headline and the employment subcomponent show contraction it’s hard to imagine that the market will be able to keep USDJPY above the 112.00 figure for long. On the other hand, if the data surprises to the upside the pair could verticalize all the way to 113.00 as short finally throw in the towel.