What Will The Fed Do Today?

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Market Drivers May 1, 2019
Euro, cable continue recovery
All eyes on FOMC
Nikkei -0.22% Dax 0.13%
Oil $63/bbl
Gold $1281/oz.

Europe and Asia:
NZD Unemployment 4.2% vs. 4.3%
GBP UK PMI Manufcaturing 53.1 vs. 53

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

Euro and cable continued their recovery in morning London dealing with the later hitting fresh two week highs above the 1.3060 level as markets awaited the FOMC presser later in the day.

With May Day holiday in Europe and Japan and China on extended holidays, liquidity was thin in FX markets allowing euro and pound bulls to push the pairs higher without much resistance. In UK the PMI Manufacturing came in just a bit better than 53.0 forecast printing at 53.1 which was still lower than then month’s prior reading of 55. The markets, however, shrugged off the data as focus now lies squarely on the Fed and their forward guidance.

The Fed finds itself in a difficult situation as US data remain relatively robust, but wages gains and price pressures continue to be muted providing little reason for tightening at this time. Still financial conditions since the start of the year have improved markedly and many on the Fed board are no doubt becoming concerned about the bubble-like conditions in financial assets as valuations get stretched.

The issue is further complicated by the constant jawboning from President Trump who only yesterday called for a 1% rate cut and return to QE in order to pump up the economy. Chairman Powell will therefore have to walk a fine line between properly assessing credit and growth risks in the economy, while at the same time trying to maintain the Fed’s independence from White House interference.

Still, it’s most likely that the Fed will maintain its “data dependence” mantra noting that US economy remains robust but conditions at this time do not warrant any tightening for the foreseeable future. The markets are essentially pricing such a scenario so the reaction to the presser may be muted, unless Fed officials assume a decidedly more hawkish tone than anticipated.

Boris Schlossberg
Managing Director

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