Federal Reserve kicks risk lower

The Federal Reserve threw the markets a bit of a googly – or should that be a curveball – last night as the minutes of their latest meeting caused traders and investors to row back expectations of further asset purchases. According to the minutes of the March meeting only “a couple of members indicated that the initiation of additional stimulus could become necessary if the economy lost momentum or if inflation seemed likely to remain below 2%”. This differs from language earlier on in the year which suggested it was more likely than not.

Stocks slumped through the US and Asian sessions with the Nikkei closing down 2% following a European session of losses as well. The dollar was the main gainer in FX markets with GBPUSD back below 1.59 and EURUSD dipping, albeit briefly, below the 1.31 level. AUDUSD has been crushed overnight once again as a result of the Fed but also following a disastrous trade balance number. Australia reported a deficit of AUD 480mio versus an expected surplus of AUD 1.2bn; further signs that exports are falling amid tightness in Asian growth markets.

A fortnight ago the profile of world data releases was one that was broadly supportive of risk; that balance has started to shift now to something more conservative and this could now form the start of the slip that we spoke about at the beginning of the week.

One country that has been bucking this moderating trend has once again been the UK. Following a surprisingly strong manufacturing PMI on Monday, yesterday’s construction PMI also smashed higher. The index hit the highest level since June 2010 with the new orders component touching a 4.5 year high. The hopes now will be that today’s services number can make it a hat-trick of growth and put to bed the fear that we fell back into recession during Q1. The figure is due at 09.30.

Similar releases are expected from the Eurozone today as well, throughout the morning, and we would expect to see further divergence between the fortunes of those in the single currency area and those outside it. Germany’s factory order figures due at 11.00 will also be closely watched following a large slump in February.

The ECB’s meeting today is likely to be a quiet one with no policy changes anticipated and a “softly, softly” approach taken by Mario Draghi in the following press conference. We don’t believe that we will see the Bank downgrade its growth forecasts for the Eurozone although it will be interesting to see what the Governor thinks of the latest OECD report for example and the efforts of Spain to bring its deficit under control.

The day rounds off with US services data at 3pm. Following the Fed’s rope-a-dope last night it has become clear that, in the absence of further asset purchases, the relationship between the US dollar and data from the US will once again change. What it seems to suggest is that strong data will now mean a strong US dollar, lower gold and lower equities.

We also have a Spanish bond auction today for around EUR3.5bn, the first since the latest austerity budget.

You can join us for a run-down of sterling’s prospects over the next month with Jeremy Cook as he deciphers the impact of Thursday’s morning’s Bank of England announcement.

The 1st quarter has shown the broad splits in the growth prospects for industrialised nations through the end of 2011 and into 2012. How different will Q2 be and what are the major risks to watch out for?

Indicative Rates Sell Buy
GBPEUR 1.2035 1.2063
GBPUSD 1.5875 1.5902
EURUSD 1.3177 1.3200
GBPJPY 131.29 131.56
GBPAUD 1.5455 1.5480
GBPNZD 1.9461 1.9489
GBPCAD 1.5751 1.5783
NZDUSD 0.8148 0.8168
GBPZAR 12.31 12.36
USDZAR 7.7555 7.7850
GBPPLN 4.9829 5.0106
EURJPY 108.95 109.22

Please note these rates are “interbank” rates ie they indicate where the market is currently trading and are not indicative of the rates offered. Rates are dependent on amount transacted. It is important to remember that foreign exchange rates fluctuate all the time. The rate you will receive will depend on the amount and currency you require.

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