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Talking Points:

• Markets’ focus to return to Fed rate bets as post-BOJ volatility recedes

• US Dollar may be more responsive to upbeat vs. soft April ISM figures

• NZ Dollar extends gains on neutral RBNZ posture, Yen corrects lower

A relatively quiet economic calendar in European trading hours puts the spotlight April’s Manufacturing ISM print out of the US. Expectations point to a slight slowdown in the pace of factory-sector growth. US news-flow has increasingly softened relative to consensus forecasts in recent weeks, opening the door for a downside surprise.

Last week’s FOMC policy announcement pointedly de-emphasized external risks and appeared to push investors back toward a focus on domestic developments as the key to policy bets. With that in mind, a soft ISM print may undermine near-term rate hike speculation and weigh on the US Dollar. It may likewise boost risk appetite, offering support to sentiment-sensitive currencies such as the Australian Dollar.

With that in mind, it is important to consider that priced-in tightening expectations implied in Fed funds futures have broadly firmed even as US data outcomes soured over the past three weeks. Indeed, the greenback’s sharp losses late last week seemed to owe more to knock-on effects from a BOJ-inspired USD/JPY drop rather than anything explicitly US-related.

This may imply that the markets may shrug off a soft ISM print absent a truly abysmal outcome. Alternatively, an upside surprise the clashes with recent trends may trigger a scramble to readjust portfolios and inspire outsized volatility. Needless to say, the US unit is likely to trade higher against most of its top counterparts in this scenario.

A quiet start to the trading week saw the major currencies trading little-changed overnight. The New Zealand Dollar narrowly outperformed as 3-month borrowing costs edged higher, hinting the move reflected follow-on from last week’s RBNZ rate decision. The Japanese Yen corrected slightly lower having enjoyed the strongest rally in a month last week.

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Asia Session

European Session