Fed minutes prompt USD strength

The main theme in the FX space was US dollar strength as market participants reacted to the latest round of FOMC minutes.

- Greenback rises on Fed minutes

- Tapering could be delayed

- Risk FX loses ground to the USD

The minutes showed that the majority of members expect tapering by the end of the year and for purchases to end around the middle of next year. This saw the greenback bounce after having slumped on the Janet Yellen appointment news, with the dollar index putting on 0.4%. The Fed would want to see growth tracking above 2% year-on-year and unemployment consistently dropping before tapering.

Tapering could be delayed

Given the current state of political affairs in the US, there will certainly be scepticism around how soon tapering will occur. Many analysts actually now feel we won’t see tapering until next year. The fact that the Fed re-emphasised its dependence on data points towards a wait-and-see approach, particularly given the impact the current political stalemate will have on data releases in the near term. Yellen’s appointment will also go a long way towards re-adjusting expectations.

Risk FX loses ground to the USD

Most major currencies lost ground to the greenback on the back of the minutes; with GBP/USD slipping below 1.60 after this level had held for a while. Cable printed a low of 1.592 but remains within striking distance of the key 1.60 handle. There was also a string of disappointing economic releases out of the UK which contributed to pound weakness, with manufacturing production, trade balance and industrial production all falling short of expectations. Cable will remain in focus ahead of the BoE later today and any hawkish comments from the central bank would see the pair bounce off these levels.

EUR/USD also came under pressure but managed to hold onto the 1.35 handle. The main headline for the single currency was a comment by the ECB’s Weidmann suggesting there is no need for a new LTRO or other measures which helped the euro remain steady. Later today we have French/Italian industrial production and the ECB monthly bulletin but we still expect the 1.35 handle to hold. On the USD front we have unemployment claims and Fed member Bullard on the wires. Traders will continue to search for clues on tapering.

AUD/USD has had a busy Asian session, with the all-important jobs numbers being released. The unemployment rate came in at 5.6%, beating estimates of 5.8%, with 9,100 jobs added (vs 15,200 expected). However, the participation rate was 64.9% versus estimates of 65.2%. We have been saying all week how we feel AUD downside on local data is limited and we continue to feel global macro-economic forces will have a bigger impact. The current range between 0.93-0.95 is likely to continue to hold.

Cable threatening to break uptrend support
Cable threatening to break uptrend support

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