The Battle of the Banks – Will the EUR or USD Prevail?

As expected, the FOMC monetary policy meeting minutes released on Wednesday provided little for the markets to consider, other than the already considered, with FOMC members clearly divided on the timing of kicking off the sell-down of the balance sheet and whether a final rate hike for the year will be warranted.

The Dollar has held its ground despite the lack of conviction, the FOMC doves clearly ruling the roost at present, with the FED having little justification in lifting rates further, if there are concerns over trimming the balance sheet, even at the particularly small quantum that have been suggested in recent months.

With the FOMC meeting minutes out of the way, the storm is certainly nearing from a Dollar perspective, with today’s ADP nonfarm payroll figures a prelude to tomorrow’s main event. The markets are hungry for direction and there will certainly be some, with today’s U.S ISM non-manufacturing PMI figures also scheduled for release, service sector activity a key contributor to U.S growth.

Economic growth indicators are the least of the FED’s concern however, with softer inflation seeming to perplex central bankers, a tightening labour market doing little to drive wage growth, a necessary for inflation to begin kicking in.

Solid ADP numbers and a positive ISM-Service Sector PMI will be Dollar positive, though the gains may well be muted ahead of tomorrow’s nonfarm payroll and wage growth numbers, the government figures the key labour market stats from the market and the FED’s perspective.

FOMC members will also be in the spotlight through the day, with Williams and Powell scheduled to speak, though we will expect the stats to do the talking through the rest of the week, barring a surprise from FED Vice-Chair Fischer overnight or an unscheduled delivery by the FED Chair.

With focus on the Dollar, the markets will need to be cognisant of the ECB’s monetary policy meeting minutes, which are scheduled for release this morning ahead of the ADP numbers, with direction for the EUR dependent upon any language in relation to a tapering to the asset purchasing program and more importantly, the timing of any move, the markets now expecting the ECB to bring forward the timing of any tapering from previously discussed end of year timelines.

We could see disappointment today, should the ECB fail to provide a more hawkish outlook on monetary policy, the EUR hitting $1.13 levels off the back of Draghi’s comments last week. Interestingly, members of the ECB had stepped forward in the wake of Draghi’s comments to advise the markets that Draghi had maintained his view on policy, members looking to soften market expectation, but to no avail, which suggests that members were not completely aligned at the time of the last meeting.

Macroeconomic data out of the Eurozone was limited to Germany’s May factory orders released this morning, which fell well short of forecasts, rising by just 1%, following April’s revised 2.2% decline. The numbers had a limited impact on the EUR, with the markets fixated on today’s minutes and key stats out of the U.S through the day, with ECB Praet’s comments ahead of the release of the minutes needing some consideration.

If the markets were looking for something to do, following a relatively quiet mid-week session, there will also be noise from the G20 Summit to consider, not to mention any escalation in rhetoric between the North Koreans and the rest of the world, the U.S President having already demonstrated his willingness to take action when deemed necessary…

At the time of the report, the Dollar Spot Index was down 0.03% at 96.258, with the EUR recovering from intraday lows to $1.13533, as the markets get set for the minutes, the view clearly being for hawkish language.

For the Dollar to find support through the stats, the ADP number will need to be north of 180K, the trade deficit to narrow and service sector activity remain stable – improving in the month of June, the market’s preferred report being the IMS survey released shortly after the finalized June Markit figures, though the Dollar Spot Index could be in a spot of bother should the ECB deliver a particularly hawkish and decisive minutes ahead of the U.S stats.