Eurozone Shows Life, Fed Next

Positive surprises in Eurozone GDP and German inflation lifted the euro and threaten to upend the miserable theme underpinning the region. GBP and CHF are at the top of the day's FX performance vs USD. UK April manuf PMI manuf slipped to 53,1 from 55.1 as was expected, while US April ADP shot up to 275K from 151K. All eyes turn to US services ISM, followed by the FOMC decision at 19:00 BST and Jay Powell's press conference at 19:30 BST.

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The advance report on Q1 GDP in the Eurozone showed growth at +0.4% q/q compared to +0.3% expected. It's a rare surprise in what has been a poor run of data in Europe. It was flanked by German HICP at 2.1% y/y compared to 1.7% expected.

The numbers allow the ECB to breathe a sigh of relief after months of insisting that a growth pickup was coming. At the same time, both of these numbers are backwards looking and it will take a turn in the PMIs to inspire genuine optimism. For now, the euro rose back above 1.12 and back into the six month range that was broken last week.

False range breaks is a major theme on the charts. Yen crosses had looked to be breaking out two weeks ago but have now reversed. Cable also posted a big gain on Tuesday that was inspired by Brexit talks and month-end rebalancing.

The dominant theme in FX was USD strength until the start of this week. Strong US readings on home sales and consumer confidence underscored the theme that USA is the most-solid developed market economy. The S&P 500 also shook off an early slump to finish higher.

The Fed decision is up next and it's a potential minefield. A number of economists expect the Fed to cut IOER by 5 basis points. It's somewhat of a technical move but will ease financial conditions and will appear to be dovish if it takes place. At the same time, the Fed has fought hard to hike rates and the dots still show a hawkish bias. Powell may use the statement or his press conference to lean against the idea of hikes and so selling the US dollar aggresively on an IOER cut might prove to be a mistake.