Can the FOMC Meeting Minutes Save the Dollar?

Earlier in the Day:

There were no material stats released through the Asian session this morning, leaving the markets to respond to the overnight rally in the U.S equity markets, while also considering the release of tonight’s FOMC meeting minutes.

The U.S Dollar has taken a beating of late, which has seen the majors make strong strides, but some of the Asian currencies do look overbought, particularly the Aussie and Kiwi Dollars.

At the time of writing, the Aussie Dollar was down 0.18% to $0.7816, with the Kiwi Dollar down 0.17% to $0.7093.

For the Kiwi Dollar, it’s been quite a resurgence when considering the fact that sentiment towards RBNZ monetary policy and the Labour led coalition government has been particularly negative. The markets may not be fully convinced that the FED will lift rates on three occasions through the year, but the U.S economy is expected to outperform that of New Zealand and that’s before considering monetary policy divergence that still favours the U.S Dollar.

It’s not too different for the Aussie Dollar. The RBA’s unlikely to be making a shift on its neutral policy position any time soon. Concerns over tepid wage growth and household debt continue to hold back any talk of a rate hike, with the RBA also wary of the effects of a strong Aussie Dollar on trade terms and inflation.

This morning’s losses are justified, though whether there is a rebound through the week remains to be seen, with the U.S Dollar particularly sensitive to all things negative at present.

In the equity markets, the CSI300 and Hang Seng continued their rallies, with gains of 1.24% and 0.33% respectively at the time of writing, with the ASX200 up 0.18%.

The Day Ahead:

Economic data scheduled for release out of the Eurozone is on the lighter side this morning, with key stats limited to Germany’s December unemployment numbers. After another tumble in the Dollar on Tuesday, the EUR’s gains have been exasperated by some hawkish ECB commentary over the weekend, though with the EUR sitting up at $1.20 levels and pushing towards $1.21, we could see the ECB look to pin back any further upside in the weeks ahead.

Today’s stats will provide some direction, particularly when considering the fact that the German Chancellor has made little progress on talks with the SDP to form the ‘grand coalition.’

At the time of writing, the EUR was down 0.07% to $1.2051, with the risk on sentiment easing appetite for the EUR through the early part of the day.

For the Pound, economic data is limited to December’s construction PMI numbers. Following weaker than expected manufacturing numbers on Tuesday, weak figures this morning could get the markets a little jittery over the outlook towards the UK economy, with tomorrow’s service sector PMI numbers to come. The Pound has been on a tear at the turn of the year, supported by the combined impact of a weaker Dollar and hopes of a resilient UK economy providing support.

Inflation figures may suggest that the BoE will have to make a move at some point this year, but economic data will need to support such a move. If the year-end economic indicators begin to soften, we would expect the Pound to follow suit. All things considered however, it’s going to boil down to progress on Brexit negotiations and how trade talks go. After all, that’s why the Pound is sitting where it is…

At the time of writing, the Pound was up 0.07% to $1.3599, with $1.36 levels in its sights.

Across the Pond there will be a bit more activity this afternoon, with the market’s preferred December ISM Manufacturing PMI numbers scheduled for release. Anything better than forecast will likely give the Dollar a boost, though major gains will likely be on hold through the U.S session, with the markets focused on the FOMC minutes due out this evening.

The Dollar Bulls have been on the run, with sentiment towards the FED’s rate path having been particularly dovish. If the minutes suggest that there is a need to make progress on rate hikes in spite of soft inflation, the Dollar would certainly receive a much needed boost, though there are unlikely to be any surprises.

At the time of writing, the Dollar Spot Index was up just 0.02% to 91.888, with an uptick in U.S Treasury yields providing support, though how the Dollar ends the first week of the year will depend more on Friday’s wage growth, nonfarm payroll and ISM non-manufacturing PMI numbers.