Fed to Hold as Trump Cuts Loose

Market to focus on Fed statement looking for June meeting clues

Central banks around the globe have kept on the sidelines as geopolitical risk clouds are still hovering above. The Federal Open Market Committee (FOMC) two-day meeting will end with the release of the policy statement on Wednesday, May 3 at 2:00 pm EDT. The central bank is not expected to raise interest rates with the CME’s FedWatch tool showing a 95 percent probability of the range staying unchanged at 0.75 to 1 percent. Without a press conference by the Fed Chair or forecast updates the spotlight will shine solely on the text of the statement. Investors will be looking for insight into the FOMC meeting in June. The CME’s Fed futures contract prices show a 67.4 percent probability of a hike on June 14.

The US dollar has been mixed against the majors ahead of the central bank statement. The greenback has advanced against the JPY, GBP and CAD but is lower against the NZD, AUD, EUR and CHF. The USD continues to get some support from the market anticipating language in the statement validating a rate hike in June. US fundamentals have been weaker in the first quarter but not enough to derail a rate hike. The Fed noticed ahead of its March meeting that the market was not pricing in a hike, so they turned up the rhetoric. It clear this year the Fed is not afraid to tip their hand if they think investors misunderstood their intentions.

Jobs data will also be released tomorrow with private payroll processor ADP releasing its non-farm employment change on Wednesday, May 3 at 8:15 am EDT. Job creation in the private sector has beat expectations since January, but the market has a conservative estimate of 178,000 which is inline with previous forecasts.

The EUR/USD gained 0.018 percent in the last 24 hours. The single pair is trading at 1.0908 after the first day of a two-day Federal Reserve rate setting meeting. Comments from U.S. President Donald Trump have kept the market on edge. Risk appetite had returned after a shutdown of the US government had been adverted thanks to a bipartisan vote, but Trump unhappy with the negotiations called for a shutdown in September as more republican votes would be needed.

The market impact of the US President’s comments was not as big as yesterday’s statements on his plans to break the big banks but it keeps the political risk high as his tactics intend to intimidate the Democrats into compliance.

The price of oil lost 1.781 percent during the trading session. The price of West Texas is trading at $47.53 ahead of the US weekly crude inventories to be released on Wednesday, May 3 at 10:30 am EDT. The number of barrels in storage is expected to contract by 3.3 million but gasoline and distillate supplies are expected to climb as refineries are processing more but weak demand from consumers is still pressuring the price of oil.

The Organization of the Petroleum Exporting Countries (OPEC) managed to agree to a production cut deal last year that went into effect in 2017. Non-OPEC members such as Russia and Mexico joined but as the 6 month term of the deal nears the end, there is talk of an extension scheduled for May 25.

The rise in US oil production has offset the impact of the OPEC cuts on prices, but the underlying demand has not grown which poses a threat to energy producers around the world.

Market events to watch this week:

Wednesday, May 3
4:30am GBP Construction PMI
8:15am USD ADP Non-Farm Employment Change
10:00am USD ISM Non-Manufacturing PMI
10:30am USD Crude Oil Inventories
2:00pm USD FOMC Statement
USD Federal Funds Rate
9:30pm AUD Trade Balance
11:10pm AUD RBA Gov Lowe Speaks
Thursday, May 4
4:30am GBP Services PMI
8:30am CAD Trade Balance
USD Unemployment Claims
4:25pm CAD BOC Gov Poloz Speaks
9:30pm AUD RBA Monetary Policy Statement
11:00pm NZD Inflation Expectations q/q
Friday. May 5
8:30am CAD Employment Change
8:30am USD Average Hourly Earnings m/m
8:30am USD Non-Farm Employment Change

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