Slip Sliding Away - "soft economic data" you Need to know about Tomorrow's US FOMC Statement

　

Just how fragile is the US dollar right now? It can’t even muster up a gain against the political backdrop of its cross Atlantic rivals, the UK and Europe. The GBP was the best performer last week despite all indications that the UK general election on May 7th will end with no clear cut winner resulting in a coalition-forming government with potential referendums on Scottish independence or an exit from the EU. Meanwhile, the euro was the second best performer despite not being able to come to an agreement with Greece and its mountain of unpayable debt.

The U.S. economic outlook continues to be plagued by soft data, which is making USD bulls nervous as their bullish stance appears to be slip-sliding away. The USD bullish case is predicated on the fact that the Fed will raise interest rates between June and September while the rest of the global central banks stand pat, but the continued tide of soft economic data questions this thesis. Last week it was the combination of new home sales, initial jobless claims, Markit PMI, and the durable goods report. All were less than stellar, which weighed on the USD. Of course, this string of bad news is good news to the equity markets which rallied to a record high as U.S. Treasury yields slipped.

Ever since the Fed dropped "patience" from their FOMC statement the media has proclaimed that the Fed has become data dependent. You have good reason to chuckle because when hasn’t the Fed been data dependent? With this in mind, market participants now pay more than cursory attention to second and third tier data, which barely drew attention in the past, in hopes of gleaming insight into the timing of the Fed’s first interest rate hike in more than 6 years. Having said this, the market appears to be less confident in the US economy and in the ability of the Fed to deliver said rate hike which is weighing on the USD.

 

Tomorrow's FOMC statement could spell more problems for the USD as the Fed meets. Without a news conference or updated projections, the FOMC statement will be the focus. If the statement acknowledges the broadly weaker data for consumption, manufacturing, and the labor market in recent months then the USD will sell off quickly. However, if the Fed sticks with their transitory argument for the recent string of weak data then USD bulls will breathe a collective sigh of relief. We suspect that the greater challenge for USD bulls will be the April employment report on May 8, especially after the disappointing March report.