Morning Brief – Setting the tone

Charles Porter
Tue 2 May 2023

Setting the tone

Following the bank holiday here in the UK, the market will hit the ground running today. The start of May marks a critical time for markets with numerous heavy weight central banks due to publish rate decisions and some critical data scheduled for release. The overnight session saw focus turn to the Aussie Dollar following a surprise decision from the Reserve Bank of Australia. However, as the European session progresses, attention today should shift towards the Euro. A European survey of bank lending will precede the latest Eurozone inflation report in hitting headlines this morning. These two reports are expected to heavily influence how the Governing Council will vote on the interest rate decision due on Thursday. The market will therefore be taking significant interest in the data due to be delivered today with scope to move the Euro. 

Following the focus on the Eurozone monetary outlook, traders will turn to the US. The Fed remains in a blackout period with no significant data other than survey data scheduled for release today and tomorrow. However, pre-Fed decision positioning should still invite volatility to the US Dollar. JP Morgan’s deal to acquire First Republic bank also reduces the risk of a flare up in US banking turmoil. Whilst the story of First Republic was yet another story of a struggling regional US lender, the deal should reduce destructive headlines that have been generating a safe-haven demand across financial markets. However, many have suggested it is only a matter of time until the target is set upon the back of another less well capitalised regional bank. 

The ECB and Fed decisions that precede the Bank of England decision next week should prove decisive in setting the tone for markets for the immediate future. How the Fed deals with expectations that it has or is approaching its terminal rate and will begin to cut into year-end could have significant ramifications for the Dollar. With many participants calling for up to 1% cuts to rates from the Fed before year end, there is still a lot to play for in setting rate expectations for the market tomorrow. 

Discussion and Analysis by Charles Porter

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