The Euro may bounce on December’s CPI data while the US Dollar faces pressure as minutes from December’s FOMC meeting cool rate hike bets.
Euro May Bounce if December Inflation Data Proves Better Than Forecast
US Dollar Vulnerable if FOMC Minutes Undermine Hawkish Fed Outlook
Japanese Yen Corrected Lower Overnight After 2 Days of Aggressive Gains
Later in the day, the US Dollar may face selling pressure if minutes from December’s FOMC policy meeting force investors to rethink the announcement’s hawkish implications. The greenback rallied when the results of the sit-down were unveiled, seemingly inspired by the Fed’s decision to back away from language pledging to keep rates low for a “considerable time following the end of its [QE3] asset purchase program”. Instead, policymakers adopted new verbiage arguing that the central bank can be “patient in beginning to normalize the stance of monetary policy”. The currency’s reaction suggests this was seen as a hawkish guidance shift.
Traders may have over-estimated the implications of the Fed’s language adjustment however. The pre-December narrative was conditioned on the end of QE as a reference point. With that program over, an update was probably appropriate on purely contextual grounds and need not have signaled a policy change. Indeed, Fed Chair Yellen and company explicitly said that the new guidance is “consistent” with the old. Meanwhile, the FOMC trimmed the expected scope of rate hikes in 2015. The average in December envisioned the outer band of the baseline rate range at 1.25 percent by the end of next year compared with 1.4 percent in September’s outlook.
The Japanese Yen underperformed in overnight trade, falling as much as 0.6 percent on average against its leading counterparts. The move appeared corrective after the currency put in the strongest advance in three weeks on the back of risk aversion to start the trading week. An aggressive selloff on global stock exchanges has translated into an unwinding of carry trades funded in the perennially low-yielding currency, fueling short-covering on anti-JPY bets.
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