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GBP: Strong focus on the manufacturing PMI data and with liquidity lower owing to the holiday in many European countries, there is the risk of some outsized moves in sterling. The market looks for 48.5 reading and anything above the 50 level would be very welcome and would place a decent bid under sterling.   Note that BoE members Broadbent and Bailey speak at 17:00 and 19:00 GMT respectively.

USD: The FOMC meeting decision at 18:00 GMT will be a case of scanning the statement for any shift in language or tone. We doubt that there will be anything beyond subtle shifts in the description of the economy, with the more important language on policy remaining unchanged. Dollar volatility should be limited, but with a risk of modest gains.

See how to trade the Manufacturing PMI with USD/JPY.

Idea of the Day

Tuesday proved to be a fairly volatile day for currency markets, in part as month-end flows dominated trading. What has been notable is that the US dollar has been in retreat vs. other major currencies, sterling gaining 0.5% over the week vs. the dollar and the Swiss franc up 1.4% over the same period.

There have been concerns regarding the durability of the recovery in the US, but the question is whether we are going to see any of these concerns reflected by the US central bank later today as they announced their latest policy decisions.

No changes to their current plans on quantitative easing (QE) are expected, so the focus will be on the language used to describe the current state of the economy.   If anything, the risk is that the market has become too expectant of the Fed shifting its stance and we see risk of a less ‘dovish’ statement that anticipated, leading to some near-term dollar reversal.

Latest FX News

JPY:  USDJPY has seen five consecutive days of declines, benefitting on Tuesday from the generally weaker tone to the dollar.   We talked earlier in the week on the signs of a shift in sentiment towards the yen and the price action yesterday further confirms that the short yen story is now looking tired.

EUR:  The single currency was finding some decent month end buying on Tuesday, with the weaker US Chicago prompting some buying and the stronger consumer confidence only causing a small dent in the rally towards the 1.3186 high.

AUD:  The Aussie dollar was being dragged higher on the coat-tails of gains in other currencies, principally the euro, during Tuesday.   The reluctance to push higher was notable and suggests there are still forces holding the Aussie dollar back. Next upside resistance is seen at 1.0414.

CHF: The Swissie was gaining vs. the single currency during Tuesday, taking EURCHF down to the 1.2230 area. The reserves data showed the SNB further diversifying its reserves away from euros in the first quarter, more notably towards the yen.

CNY: Latest manufacturing PMI data showed small fall to 50.6 from 50.9, broadly in line with expectations, but in the bigger picture, has continued perception of generally slower growth in Asia. South Korea saw weaker production yesterday, with slower inflation (1.2% YoY) and declining trade balance seen today.

Further reading: ECB Preview: 4 Scenarios