Talking Points:

British Pound May Not See Follow-Through on PMIs as BOE Rate Decision Looms
US Dollar Volatility Risk Skewed to the Upside on ISM and ADP Data, Fed-Speak
Aussie Dollar Gains on China PMI, NZ Dollar Slumps on Disappointing Jobs Print

The final set of October’s UK PMI figures headlines the economic calendar in European trading hours, with the rate of overall cross-sector activity growth expected to accelerate for the first time in four months. The trend in UK news-flow has cautiously improved relative to consensus forecasts over recent months (albeit unevenly), opening the door for an upside surprise.

That may boost BOE policy bets, sending the British Pound higher. Near-term follow-through may be limited however, with investors probably reluctant to take firm directional views ahead to this week’s monetary policy announcement.

Later in the day, Fed “liftoff” speculation returns to the forefront as the ISM Non-manufacturing Composite gauge as well as ADP Employment data are released. If that were not enough, traders will also have to contend with a packed schedule of Fed commentary.

The markets have a sense of most Fed officials’ bias. Governor Brainard leans dovish while Chair Yellen, Vice Chair Fischer and New York Fed President Dudley are the core middle ground cautiously mulling a December hike. None of this ought to sound novel. Comments from Philadelphia Fed President Harker may be interesting however as markets learn about the newcomer replacing veteran hawk Charles Plosser.

As for the data, expectations call for slightly softer outcomes for both ISM and ADP but this is unlikely to spark much of a response since the markets’ outlook is already more dovish than Fed officials have signaled. On the other hand, upbeat results may encourage repositioning ahead of Friday’s payrolls data and push the US Dollar higher.

The New Zealand Dollar underperformed in overnight trade after a disappointing third-quarter jobs report drove RBNZ rate cut speculation. Employment unexpectedly fell 0.4 percent in the three months through September, marking the worst reading in three years. Wages growth also slowed, undermining medium-term inflation trends.

The currency fell alongside front-end New Zealand bond yields, hinting that the release inspired stimulus expansion bets. Traders now price in a 50 percent probability of a 25bps rate cut at the next RBNZ policy meeting, according to expectations implied in OIS.

By contrast, the Australian Dollar traded broadly higher following a supportive set of Chinese data. The Caixin Composite PMI gauge manufacturing- and service-sector activity growth stabilized in October after the fastest contraction in at least two years in the prior month. China is Australia’s top trading partner and signs of improvement there seemed to fuel hopes of positive spillover via improved export demand prospects.

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