Forget Trade Rhetoric – All Eyes on US Data

Market Drivers August 1, 2018
FOMC on tap
UK PMI Manufacturing in line
Nikkei 0.86% Dax -0.13%
Oil $68/bbl
Gold $1222/oz.
Bitcoin $7600

Europe and Asia:
EUR EZ PMI Manufcaturing 55.1 vs. 55.1
GBP UK PMI Manufacturing 54.0 vs. 54.2

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

It’s been quiet nigh of trade in FX, though early Asia headlines on trade managed to infuse so turbulence into the market before currencies settled into narrow ranges.

Reports that US is considering increasing tariffs on Chinese goods from 10% to 25% stirred the market with AUDJPY dropping the hardest on the news, but after some clarification the market realized that this was merely a proposal rather than hard policy and that the final decision was not due until end of August, so trader shrugged off the news chalking it up to yet another Donald Trump gambit.

In Europe meanwhile, the focus was on Manufacturing PMIs as final readings poured from across the whole region. On balance, the data was in line with EZ PMI printing at 55.1 as expected but the German release showed further softening as trade tensions are taking their toll, though overall the data shows that the sector remains comfortably above boom/bust level as growth continues.

In UK the PMI Manufacturing softened a but as well with sentiment hitting a 20 month low but the headline number still managed to post a 54.0 reading versus 54.2 eyed indicating that for now at least, the sector remains relatively healthy.

More and more experts are suggesting that the Bank of England should hold off on the planned rate hike tomorrow given the growing possibility of a hard Brexit, but the MPC is likely to stick to its guns as its very credibility is at stake. Most likely, however, the BOE is going to guide cautiously suggesting that August rate hike is “one and done” until some positive progress is made on Brexit talks. Cable held bid above the 1.3100 figure in quiet post-release trade.

Although trade war headlines continue to pop up on trader’s screens, the market is essentially ignoring the issue for now with focus set squarely on US data. Today, traders will get a look at ADP, ISM Manufacturing and the FOMC statement. Unless the data disappoints, the path of least resistance for USDJPY is up. With US economic activity showing few signs of a slowdown yet, the Fed is likely to remain on its tightening course for the rest of the year with market consensus increasingly coalescing around the prospect of 4 rather than 3 rate hikes this year. If the Fed stays to script then the interest rate spread between the dollar and the rest of the G-11 will widen so much that capital flows will push the buck higher. With USDJPY clearing the 112.00 figure in overnight trade the next target for longs will be 112.50 and unless FOMC surprises with dovish language the pair should move through that level as the day proceeds.