Dollar Wobbles Ahead of FOMC Minutes

Market Drivers October 8, 2015

Euro probes 1.1300
German Trade Balance slightly weaker 19.6B vs. 20.2B
Nikkei -0.99% Europe -0.18%
Oil $48/bbl
Gold $1143/oz

Europe and Asia:
EUR GE Trade Balance 19.6B vs. 20.2B

North America:
BOE Decision 7:00
CAD NHPI 8:30
USD Weekly Jobless 8:30
USD FOMC Minutes 14:00

The dollar was slightly lower in early European trade dropping against both the euro and yen on a combination of slightly negative risk flows and investor trepidation ahead of the release of the FOMC minutes.

The euro spiked to take out the stops above the 1.1300 level and remained generally well bid in morning dealing as it continues to consolidate in the 1.1200-1.1300 range. The single currency has been remarkably resilient in the face of steadily deteriorating data from the region especially from Germany.

Today’s German institutes cut GDP growth estimates for 2016 from 2.1% to 1.8% but we believe even that estimate may be optimistic as Eurozone’s largest economy struggles with both internal and external shocks that are likely to take a bigger toll in growth next year.
We firmly believe that the policy divergence between the Fed and the ECB will only widen in 2016 as the former moves towards normalization while the latter remains firmly entrenched in expanding QE. None of this however appears to interest the market at the moment as the EUR/USD continues to challenge the upper end of its recent range with traders far more focused on the disappointing series of delay from the Fed rather than the deteriorating economic conditions in Europe.

Today the market will get a look at the FOMC minutes from last month’s meeting and the market will look at the tone of the report to see just how hawkish the Fed is at the moment, It’s clear that policymakers are eager to get off the zero bound level, however today’s release could shed light on just how many on the Fed board are tilting towards a rate hike and how many prefer to wait a while longer.

The impact of the minutes may be diluted by the fact that the latest US employment data was decidedly softer than forecast and may be signaling a slowdown in the US economy. Still if the overwhelming tone of the minutes is hawkish, much of the dollar weakness that we are seeing in morning US trade may be quickly reversed.