Unable To Make Headway Into Fed Policy Decision

The Pound to Dollar (GBP/USD) exchange rate has consolidated below 1.2500 ahead of the Federal Reserve policy meeting.

The Pound to Euro (GBP/EUR) exchange rate retreated to below 1.1700.

On GBP/USD Scotiabank commented; “Intraday price action for the pound is also leaning mildly bullish. Gains are limited, however, and the pound has more work to do to improve after the sharp fall in the pound yesterday from the mid-1.25s, where the 200-day MA resistance resides.”

US ADP data recorded an increase in private payrolls of 192,000 for April compared with consensus forecasts of around 180,000 while the March increase was revised up to 208,000 from 184,000 reported originally.

Year-over-year wage gains for job-stayers was marginally lower at 5.0%.

According to ADP Chief Economist Nela Richardson; “Hiring was broad-based in April. Only the information sector — telecommunications, media, and information technology — showed weakness, posting job losses and the smallest pace of pay gains since August 2021.”

The US ISM manufacturing index retreated to 49.2 for April from 50.3 previously and below consensus forecasts of 50.0.

The prices index, however, strengthened to 60.9 from 55.8 the previous month.

The JOLTS data recorded a decline in job openings to 8.49mn for March from a revised 8.81mn previously.

This was below market expectations of 8.68mn and the lowest reading since May 2021.

The Federal Reserve will announce its latest interest rate decision after the European close and rates will be held at 5.50%.

Overall guidance from the bank and Fed Chair Powell will be crucial.

According to Scotiabank; “The Fed might sound a bit more hawkish today relative to the last FOMC—lifting the USD initially—but, when the dust settles, traders may view profit-taking as the best option if there are no clear catalysts to drive yields (and the USD) even higher.”

MUFG In light of the hawkish repricing that has already taken place in the US rate market, it provides a much higher hurdle for hawkish policy surprise today that injects fresh upward momentum into the US dollar.”

It added; “However, the dollar’s index’s close proximity to year to date highs in the run up to today’s FOMC meeting does increase the risk of another lurch higher. For an even bigger US dollar rally, the Fed would have to seriously cast doubt on the need for rate cuts at all this year which seems like too large a leap after still planning three cuts at the March FOMC meeting.”

ING expects a hawkish tone; “Powell will have to acknowledge that US price trends have reversed higher, activity is holding up well and that any easing this year will have to be delayed. And at the moment it is hard to argue against the market pricing out the one last 2024 Fed cut at some stage soon.”

According to BNP Paribas; “It’s pretty clear from the way that the data has been that we’re going to see a focus shift from the last Fed meeting, the question is the extent to which Powell has already previewed the shift of rhetoric when he last spoke.”

It did, however, add, “Heading into the Fed, we see that from a short-term perspective the dollar is not looking cheap anywhere.

Immediate Pound direction will be dominated by dollar moves, but the Bank of England will meet next week.

Paul Mackel, head of FX research at HSBC commented; “The start of the BoE’s rate-cutting cycle should see GBP weaken.”

He added; “HSBC Economics expects the BoE to begin cutting rates in June, which should start mechanically compressing the nominal yields of the currency versus those that are not rushing to cut.”