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We have passed the first major hurdle, with a bit more confusion being thrown into the mix by the latest Fed comments. There were no major surprises from the Fed but analysts feel the statement was slightly more dovish, particularly on the inflation front and slight change in growth language. The Fed is concerned about disinflation (with inflation consistently below its 2% objective) and changed its growth language from moderate to modest.
The USD got off to a strong start in US trade as the ADP non-farm employment change (200,000) smashed consensus, along with a strong advance GDP print. The USD lost some ground later in the session as Fed comments hit the wires.
USD/JPY enjoyed an initial spike higher to 98.60 before dropping back into 97.80 where it is currently trading. Weekly fund flow data released out of Japan this morning showed declines in stock and bond buying on both the international and domestic front. This is quite negative for the yen and might see USD/JPY drift higher in the rest of Asian trade.
On the risk FX side of things, AUD/USD is now trading below 0.90 and will likely be sold on a recovery to 0.90 – which is now resistance. There has been some data out of China today with the official manufacturing PMI number coming in at a better than expected 50.3 (versus a 49.8 estimate). With China’s manufacturing still in expansionary territory, risk got a bit of a kicker; but AUD/USD still continues to struggle.
Trading the EUR/USD has been very tough of late and we have preferred to look at long EUR/AUD positions given the strong uptrend. Range trading has worked best and that strategy should continue to be in place, helped by some better data and an improving current account surplus.
In European trade we get revisions to the PMI series; however the big event risk is the ECB meeting at 21:45 AEST and, given the improvement in the data trends, we expect the bank to retain its forward rate guidance without becoming much more explicit. Inflation is still a big issue in Europe and this will keep the ECB from becoming more hawkish, and any inflation we have seen has been driven by energy prices.
Meanwhile sterling is looking much more vulnerable of late and we feel selling cable on rallies to 1.5400 makes sense at present. In upcoming trade we get the latest manufacturing read (expected to print 49.8), while the bigger event will be the BoE meeting. The likelihood of anything major being announced is low, with most expecting more explicit forward guidance on interest rates to be announced on August 7 at the inflation hearing.