BoE Fails to Shore up Pound with Interest Rate Warning

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Headlines

  • Australian Dollar Softens as Federal Reserve Maintains Neutral Bias – Service sector contraction to add to bearishness
  • Pound Fails to Capitalise as BoE Governor Warns of Markets Underestimating Interest Rate Hike Pace – Brexit-based uncertainty keeps monetary policy on hold
  • Neutral Fed Message Helps to Limit US Dollar Downside – USD exchange rates poised for gains on labour market data
  • Contracting Eurozone Manufacturing Sector Limits Euro Demand – Stronger inflation rate could prompt EUR rally today

Neutral Fed Limits Australian Dollar Appeal

As the Federal Reserve maintained a determinedly neutral policy stance at its May meeting this limited Australian Dollar volatility yesterday. With the Fed looking set to leave interest rates on hold for some time to come market risk appetite remained fairly muted. This left the Australian Dollar lacking in any significant degree of support in the absence of fresh domestic data.
 
If the Australian services PMI remains in contraction territory this morning AUD exchange rates may see a fresh decline across the board.
 
BoE Comments Fail to Shore up Pound
 
Even though Bank of England (BoE) Governor Mark Carney warned that investors are underestimating the likely pace of future interest rate rises this failed to boost the Pound last night. As the BoE voted unanimously to leave interest rates on hold once again the mood towards the Pound soured, with markets betting that Brexit-based uncertainty will keep monetary policy static for longer. A modest rebound in April’s UK construction PMI also failed to extend the bullish run of GBP exchange rates.
 
A similar improvement in the corresponding services PMI could offer the Pound a rallying point ahead of the weekend, though.
 
Euro Loses Ground as Eurozone Manufacturing Contraction Confirmed
 
Confirmation that manufacturing activity across the Eurozone stalled in April left the Euro on a weaker footing against its rivals. As the manufacturing sector started the second quarter with a fresh contraction this offered investors fresh incentive to sell out of the single currency. EUR exchange rates also weakened in response to a surprise contraction in annual German retail sales, which slumped -2.1% in March as domestic confidence deteriorated.
 
However, if the Eurozone consumer price index picks up as forecast this evening demand for the Euro could recover.
 
Neutral Fed Outlook Limits US Dollar Downside
 
The neutral tone of the Federal Reserve’s May policy announcement did little to bolster the appeal of the US Dollar. However, with the central bank also appearing less likely to return to a monetary loosening bias in the months ahead this limited the downside potential of USD exchange rates overnight. While jobless claims figures failed to match forecasts this was overshadowed by a solid rally in factory orders, which rose 1.9% in March.
 
Tonight’s change in non-farm payrolls figure could see the US Dollar making solid gains across the board if the labour market continues to show signs of tightening.
 
Weak Oil Market Keeps Canadian Dollar on Downtrend
 
As oil prices remained in a state of retreat this limited demand for the commodity correlated Canadian Dollar last night. With rising US production putting pressure on the global oil market, pushing Brent crude below US$71 per barrel, confidence among investors naturally eased. The recent weakness of Canadian growth data added to the bearish mood of CAD exchange rates.
 
Unless the oil market shows signs of recovery, or US data falls short of forecast, the potential for a Canadian Dollar rebound appears limited today.
 
Building Permits Contraction Drags on New Zealand Dollar
 
Demand for the New Zealand Dollar remained muted yesterday after March’s building permits figure saw a sharp contraction on the month. As permits fell -6.9% this undermined confidence in the outlook of the domestic construction sector, as well as the wider economy. With the New Zealand economy continuing to show signs of losing momentum NZD exchange rates were left to trend lower.
 
With no fresh domestic data set for release today the potential for any New Zealand Dollar gains seems limited.

Data Releases

May 3rd 08:30 AUD Services PMI (APR)
May 3rd 18:30 GBP  Services PMI (APR) 
May 3rd 19:00 EUR Eurozone Consumer Price Index (YoY) (APR) 
May 3rd 22:30 USD Change in Non-Farm Payrolls (APR)

Post by TorFX

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