Post FOMC – Dollar Not So Much

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Market Drivers May 3, 2018
UK PMI Services rises but misses forecast
EZ inflation remains non-existent
Nikkei -0.16% Dax -0.15%
Oil $68/bbl
Gold $1310/oz.
Bitcoin $9196

Europe and Asia:
GBP UK PMI Services 52.8 vs. 53.1 eyed
EUR EZ CPI 1,2% vs. 1.3%

North America:
USD Weekly Jobless 8:30
USD ISM Non- Manufcaturing 10:00

The post FOMC dollar rally fizzled badly with USDJPY failing to take out the 110.00 level in Asian session trade and falling through 109.50 support by London mid-morning dealing.

EURUSD and cable had their own idiosyncratic issues, but even poor economic data from both regions failed to push the pair lowers for longer than an hour.

In the UK the PMI Services report printed at 52.8 versus 53.1 eyed. This was better than last months woeful 51.7 reading but still came short of serious rebound. According to Markit, “Index picked up slightly from March’s 20-month low of 51.7. The latest reading still only signalled a moderate increase in service sector activity, with the rate of growth the second-weakest since September 2016. A number of survey respondents noted that subdued consumer willingness-to-spend had held back business activity growth in April. Alongside the soft patch experienced by consumer-facing firms, there were also reports that concerns about the domestic economic outlook had acted as a brake on spending by corporate clients. Measured overall, latest data indicated the second-weakest rise in new business since August 2016 (exceeded only by last month’s weather-related slowdown).”

The PMI suggests that UK GDP should grow at 1.5% in Q2 this year – perhaps just enough to for BOE to do “one and done” rate hike next week. Cable has been so oversold that the pair did not drop much on the data and continued to build support at the 1,3600 for a possible bounce later in the day.

EURUSD also saw poor economic data as CPI printed at 1.2% versus 1.3% eyed. On a core basis CPI remains a paltry 0.7% suggesting that inflation in the region remains non-existent. However, the number did not take into account the sharp drop in exchange rates over the past few weeks, which will likely translate into slightly higher readings over the next few months. Still, the news indicates that ECB will remain dormant for quite a long time, but euro like cable was so oversold that it refused to drop much beyond the 1.1970 level and rebounded towards 1.2000 after a few minutes of the selloff.

The dollar remains in a long-term secular uptrend, but tonight’s action shows that the pair may be slightly overbought and will need a further catalyst from data to push higher. Today’s ISM Non-Manufacturing report will be watched closely. The market is anticipating a 58.1 reading and if it meets or beats the forecast USDJPY may take another run at the 110 level. But any sharp miss could quickly trigger some profit taking through 109.00

Boris Schlossberg
Managing Director

One thought on “Post FOMC – Dollar Not So Much”

  1. ECB has Southern EZ on life-support with massive bond repurchases and new purchases with a 5000 year Low in manipulated interest rates. ECB owns over 40% of all EZ gov debt plus big amounts of junk bonds in zombie corporations.
    Tapering by ECB would surely make a No Bid scenario from private investors and thus a blow out in financial costs so called PIGS countries plus France and Austria and Eastern Europe. Draghi is so cornered. Ray Dalio saw this, other professional traders see this. But nobody says this loud in media.
    A closer look at Italy reveals that more than 10% of the balance sheets of Italian banks constitute bad loans. The cost to bailout Italy is put at €189 billion while Spain comes in around €100 billion and even France will be €85 billion. In Germany, the bad loans amount to about €48 billion.
    Expect Lex Cyprus bail-ins!
    Then you have the DB derivaties…. and Chinese debt-to-GDP of 250% bladting out to 300%?
    OMG! Lehman-crisis seems like a brief breeze compared to this coming credit crunch storm…. When Sovereign Debt fails, where to run? Stocks denominated in the only World reserve currency USD?

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