Uncertain Fed & Uncertain UK Politics

The Fed's Brainard gave the strongest hint yet that low inflation won't dissuade a June hike but at the same time warned the Fed may pause afterwards. The New Zealand dollar led the way, while the Canadian dollar lagged. A UK election polls sent the pound plunging in early Asia-Pacific trade. The latest video for Premium subscribers is found below.

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The April PCE report had something for everyone. The dollar initially rallied on the headlines because core PCE rose 0.2% m/m, slightly more than the +0.1% consensus. USD/JPY ticked 25 pips higher to 111.20 but that was the high for US trading.

Weighing on the dollar was a decline in year-over-year core inflation to 1.5% from 1.6%. It was expected but it extends the trend of slipping core inflation. Downward revisions to personal income also weighed but were balanced by rosy numbers on rising service sector salaries.

The change of a June hike rose to 88% from 84% according to the CME's Fedwatch measure but the dollar later declined. A big reason is because of eroding faith in longer term rate hikes.

Later in the day, the Fed's Brainard warned the FOMC may need to reassess its projected rate hikes. For the moment, she said it was premature to make that call and that's a signal that a June 14 rate rise is coming. But along with that hike, the statement is now more likely to include language that indicates more hikes will only come if inflation rises.

The bond market is now beginning to question whether those hikes will come at all. The 10-year yield fell 3.7 bps to 2.21% and is closing in on the post-election low of 2.16%. The US dollar is following yields lower.

Meanwhile, the pound took a sharp spill briefly below 1.28 in early Asia-Pacific trading. The trigger was a poll from YouGov that modeled the distribution of votes across ridings. It showed Theresa May's Conservatives winning but falling 16 seats short of a majority. That would seriously jeopardize Brexit negotiations and cripple the government.

From here, the focus will shift to China where the official PMIs are due at 0100 GMT. The manufacturing measure is forecast to slip to 51.0 from 51.2. the prior non-manufacturing reading was 54.0.

Note that it's also the final trading day of the month so flows could be a factor.