Federal Reserve holds rates, on track for June interest rate hike

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There were no surprises from the Federal Reserve’s May meeting last night, with the FOMC keeping interest rates on hold, while suggesting that it remains on course to hike in June with policymakers in the US unanimously voting in favour of holding rates.

hile the statement acknowledged that inflation could run over the bank’s 2% medium term target, it did not appear overly concerned, suggesting that a gradual pace of rate increases would remain warranted. All in all, the meeting was mostly low-key and it was reflected on the US Dollar, remaining on its three-and-a-half month high against the Euro.

Ahead of last night’s Federal Reserve meeting, the ADP employment change number, which represents job creation in the US private sector, boded well for tomorrow’s more meaningful nonfarm payroll report. The US private sector added a net of 204,000 jobs in April, the sixth straight month where jobs added exceeded the 200k level. We think this means there is a good chance we could see a rebound in Friday’s nonfarm payrolls number following March’s six month low.

More soft UK data cements the case for no rate BoE hike

Sterling was fairly range bound against the US Dollar on Wednesday, with yesterday’s better-than-expected construction PMI providing no more than a temporary boost to the Pound. The index jumped to 52.5 in April from the 47.0 recorded in March. While a fairly sizable jump, the sector’s relatively small contribution to the UK’s overall GDP means that the impact on the currency was limited, and did little to improve hopes of a Bank of England interest rate hike next week.

This morning’s services PMI was, however, a disappointment, coming in at 52.8 versus the 53.5 consensus. We think this further reinforces the case for rates not be hiked at next week’s MPC meeting.

Euro treads water ahead of Eurozone inflation release

The EUR/USD rate ended lower during London trading yesterday for yet another day, slipping back below the 1.20 level and extending its run of losses to almost 3.5% since mid-April. Currency markets mostly overlooked Wednesday’s economic data out of the Eurozone in favour of broader trends, namely the widening interest rate differentials between the Euro-area and US. The preliminary first quarter GDP number came in as expected at 0.4% QoQ for the first three months of the year. The more up-to-date manufacturing PMI for April was modestly better-than-expected, coming in at 56.2 versus the 56.0 consensus.

We now look ahead to this morning’s inflation data, one of the most significant economic data releases when it comes to ECB policy making. Any undershooting of the 1.2% core inflation estimate could extend losses for the single currency today.