US Dollar, Major Currencies Look to ISM and Fed-Speak for Direction

DailyFX   |  May 1 2012 4:00 EDT

Currency markets are looking to the ISM Manufacturing gauge and a busy docket of Fed commentary for guidance as the likelihood of QE3 remains in focus.

Talking Points

• British Pound May Extend Selloff on Soft Manufacturing PMI Result
• ISM Data, Fed Commentary in Focus for US Dollar and Risk Appetite
• Australian Dollar Tumbles as RBA Unexpectedly Cuts Rates by 50bps

Most major European markets are closed for the Labour Day holiday, making for a light economic calendar and thin trading conditions. UK Manufacturing PMI figures round out the docket, with expectations calling for factory-sector growth to cool in April to reverse the acceleration recorded in the previous month. Monetary policy expectations are in focus for the British Pound, meaning the currency may have scope to extend losses after recording its first daily decline in two weeks yesterday.

Later in the session, the US ISM Manufacturing report enters the spotlight. Forecasts call for a mild slowdown in April that keeps the modest uptrend carved out from July of last year intact (a print below 52.6 would be needed to snap the trend, and a 53.0 result is expected). Expectations for QE3 remain central for the US Dollar and risk appetite at large, meaning a soft outcome is likely to be taken as fodder for stimulus hopes and weigh on the greenback. An upside is expected to produce the opposite effect. A busy docket of Fed commentary including regional branch Presidents Kocherlakota, Williams, Evans, Lockhart and Plosser will be evaluated along the same lines.

The Australian Dollar tumbled in otherwise quiet overnight trade after the Reserve Bank of Australia unexpectedly slashed interest rates by 50 basis points, bringing the benchmark lending rate to 3.75 percent. RBA Governor Glenn Stevens noted in the statement accompanying the decision that global economic growth would likely “continue at a below-trend pace this year,” singling out conditions in Europe as “very difficult”.

On the domestic front, Stevens said output growth has been “below trend” while “inflation will probably be lower than earlier expected” over the coming one to two years, establishing scope for further easing in the months ahead. Markets are now pricing in 125bps in further rate cuts over the coming 12 months according to data compiled by Credit Suisse.

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

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