Fed holds steady
The Pound drifted lower as confidence in the domestic economic outlook remained fragile and further doubts arose about easing of lockdown restrictions. Sterling dropped below 1.2400 against the Dollar until stronger risk appetite provided net support. The Euro followed much the same story, gaining 75 pips in the morning but relinquishing all but 10 by the close of play. The UK Covid death toll included care home fatalities for the first time, and therefore the total was sharply higher. Concerns grew that the UK would lag behind European countries in securing economic recovery making Sterling less buoyant than other risk-sensitive currencies. Foreign Minister Donminic Raab reiterated that the government would not seek an extension to the December 2020 Brexit transition deadline. This morning the Euro has held onto limited gains to trade in the 1.1455 area and the Pound is trading near 1.2470 against a softer Dollar.
The flash reading of Q1 US GDP showed an annualised rate of -4.8% (contraction). Consumer spending declined 7.6% for the quarter with investment also registering a significant contraction. Net exports were positive as imports declined sharply while government spending made a small positive contribution. The muted currency reaction was part “wait and see” and part confidence in the outcome for the evening’s Fed Monetary Policy meeting.
The Federal Reserve (Fed) held interest rates in a 0.00-0.25% range, in line with consensus forecasts. According to the statement, the coronavirus outbreak and on-going public-health crisis will weigh heavily on economic activity, employment and inflation. It also poses considerable risks over the medium term and the committee expects interest rates to remain at current extremely low levels until it is confident that the economy is on track to achieve maximum employment and inflation goals. The Fed will also continue to buy bonds in amounts to support smooth market functioning and continue to offer large-scale repo operations.
The dollar edged lower in an immediate reaction to the statement. Chair Powell stated that the Fed is not going to be in a hurry to withdraw support and he also stated that he believed there will be the need for the central bank to do more. The dollar held limited losses following Powell’s comments with the Euro near 1.0880.
Euro-zone money supply growth strengthened to 7.5% in the year to March from 5.5% previously. German CPI inflation slowed to 0.8% for April from 1.4%, but slightly above consensus forecasts of 0.7% with limited policy implications.
Finishing off April on a negative note unfortunately looks the most likely for the Euro, as German data is expected to show an increase in jobless rates alongside the European Central Bank having little to no room for any hawkish bias.
As of writing, the Euro is currently trading around 1.0880 against its US counterpart, down from the monthly opening rate of 1.1040. The common currency has been downplayed this month on the inability of the European nations to agree to a comprehensive coronavirus stimulus package and the resulting fears of a prolonged economic downturn.
Data to watch
05:30 – EUR – French Flash
07:00 – EUR – Spanish Flash
09:00 – EUR – Prelim Flash
11:45 – EUR – Main Refinancing Rate
11:45 – EUR – Monetary Policy Statement
12:30 – EUR – ECB Press Conference
12:30 – USD – Unemployment Claims
12:30 – USD – Personal Spending
13:45 – USD – Chicago PMI