Markets Braced For Huge US Day Ahead, Substantial Moves Possible

The Pound to Dollar (GBP/USD) exchange rate hit 2-week highs at 1.2565 on Tuesday before a retreat to below 1.2500 and traded around 1.2475 in early Europe on Wednesday.

Dollar strength and a slide in US equities were crucial in dragging GBP/USD lower.

There are major events on Wednesday with the combination of Federal Reserve policy decision, US data releases and trends in risk conditions set to trigger substantial GBP/USD moves.

The Federal Reserve will announce its latest policy decision after the European close.

There is no possibility of a change in rates with the Fed Funds rate held at 5.50%.

Guidance within the statement will be significant while Chair Powell’s press conference will also be extremely important.

Inflation data has been stronger than expected which will make it difficult for Powell to talk of interest rate cuts.

There has, however, been evidence of a slowdown in the economy and a softer labour market. Powell will, therefore, have to address recession risks.

Markets expect more hawkish guidance and have ruled out the potential for a near-term rate cut with the chances of a July cut now only just above 20%.

Given market sentiment and expectations, the dollar will be vulnerable if the rhetoric is not especially hawkish.

Any talk of rate hikes would, however, trigger sharp dollar gains.

MUFG commented; “We expect Fed Chair Powell to reiterate that the recent run of stronger US activity and inflation data will delay their plans to begin lowering rates into the 2H of this year.”

It added; “The US rate market has already pushed out the timing of the first rate cut until the end of this year in November or December which should help limit upside risks for the USD.”

There are also three big data releases during the day with a focus on employment trends.

The ADP will release the latest report on private-sector employment. Consensus forecasts are for an increase in payrolls of around 180,000 from 184,000 previously.

As far as the labour-market is concerned, the latest JOLTS job-openings data will also be released.

Market expectations are for a slowdown to 8.68mn from 8.76mn previously.

Weaker jobs data would make it easier for the Fed to sound more relaxed on inflation trends.

The ISM manufacturing data is also scheduled. Consensus forecasts are for a slight retreat to 50.0 from 50.3 in March.

A significant retreat into contraction would raise fresh doubts over the economy while the pricing data will be important for inflation expectations.