Dollar drives higher ahead of Fed minutes

The EUR/USD and GBP/USD pairs drift lower as traders await the ADP report and Federal Reserve minutes. 

US dollar bills
Source: Bloomberg

Euro edges lower over deflation fears

The EUR/USD pair is trading lower again as traders await eurozone inflation data at 10am (London time), where consensus is for a reading of -0.1% in December. If inflation were to fall, it would be the first decline in eurozone CPI in five years, which would ramp up speculation that the European Central Bank will begin a quantitative easing scheme. Mario Draghi has dropped several hints about buying government bonds, but has always shied away from it; a contraction in the rate of inflation could force his hand.

The euro is also coming under political pressure as the election in Greece later this month could signal a Greek exit, or ‘Grexit’ from the eurozone. The polls are putting the anti-austerity Syriza party in the lead and traders are extremely concerned about this. I feel the EUR/USD will continue to decline as we approach the ECB meeting on 22 January and the Greek election on 25 January.

The downward trend in the EUR/USD puts $1.18 in the cross hairs, and any moves higher are likely to encounter resistance at $1.20.

Sterling slides again

The pound has lost ground to the dollar in previous trading sessions, as softer-than-expected UK construction and services data gave traders plenty of reasons to short sterling. We are not expecting major economic announcements from the UK today, and this means the trading session will be dollar-dominated.

The ADP employment report is due out at 1.15pm (London time), when dealers are anticipating an increase of 227,000 jobs. This announcement will set the pace for Friday’s non farms report.

The minutes from the Fed at 7pm (London time) will clarify the reasoning behind keeping rates unchanged last month. The statement from the December meeting still included the phrase ‘considerable time’ with regard to keeping rates low, but the tone of the announcement hinted it would be prepared to increase rates potentially further down the line. I suspect the Fed will gradually move away for very dovish language, and this could keep the US dollar rally on track.

The pound has some stability in the $1.5140 region, but I foresee it approaching $1.51 in the short-term. The $1.52 level will be a difficult barrier to break through. 

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