USD downside appears limited – BTMU

European Head of GMR at BTMU Derek Halpenny sees the FOMC could deliver an upbeat tone at today’s meeting, helping the greenback to regain some shine lost in past sessions.

Key Quotes

“Some very recent sentiment readings from the US may also have added to the correction lower for the dollar with consumer confidence dropping yesterday and the Chicago PMI coming in weaker than expected as well”.

“However, we wouldn’t read too much into the sentiment data at present and given the surge in sentiment measures after Trump’s election victory, some reversal is highly likely”.

“Indeed, the Bloomberg Surprise Index for Sentiment readings has surged relative to the Bloomberg Surprise Index for actual data in the manufacturing/industrial sector. The gap between the two indices is currently the widest since 2011. So a reversal of sentiment readings might not be telling us more than simply confirming an overshoot in response to Trump’s victory”.

“Of course what will be far more telling from an FOMC monetary policy perspective will be the hard data and in particular the hard data on employment and wages. If we are correct and the US economy is effectively at full employment that will lift wage growth more notably, then the scope for the FOMC to remain patient will be very limited indeed. That realisation is likely to help underpin the divergence trade and remind market participants that even excluding Trump reflation prospects, the US economy was strengthening to a degree that no longer warrants the current level of monetary accommodation. The FOMC statement this evening is likely to maintain its more upbeat view of the economy reinforcing the message from the Fed that it will be more active in lifting rates this year than in 2015 and 2016”.