Could Fed's concerns over the low inflation harm confidence on the Dollar?

A day of mixed performances yesterday for the global money markets as we saw different reactions from the major instruments we monitor in our daily report. The broader sentiment is clearly a flight to safety from investors as they look to start the new year in a cautious and defensive manner. This sentiment has driven the Dollar higher but yesterday we saw diverging price action across the various currency pairs while the global stock markets were again in the red.

The reason behind this rally to safer havens started due to the manner that the Asian stock markets opened during the first sessions of the year as concerns about global growth drove the indexes lower and that dragged the European markets lower as well. However, yesterday the release of the Fed minutes from their last meeting on monetary policy added fresh concerns to investors. The minutes revealed that there is increased concern about the low inflation in the US and that takes away some of the bullishness of the decision.

Looking ahead the most important event traders are looking forward to is the release of the NFP employment report on Friday. Today the economic calendar has a few second-tier events that could create some price action but it is obvious that investors are being cautious during these early sessions and so should we. The US Dollar is expected to play a key role in the markets during the whole year but given the reduced confidence that the Fed minutes revealed we could be in for a bumpy ride during the first few weeks of 2016.

Taking a look at the price action yesterday and starting with the Euro we noticed a relief rally to the upside from the Single currency. The lower currency rate seems to have helped the European region gain some traction as the release of the Services’ and Composite PMI levels printed higher than last month and the Euro climbed above the 1.0800 level. This is a key area of increased importance and we need to pay close attention to whether the Euro manages to build a basis of support that will allow it to climb further. The sentiment remains bearish however so we should not draw any conclusions just yet.

On the other hand the Pound was bearish again as the release of the Services PMI figures printed lower than last month and that along with the Manufacturing figures released a couple of days ago has added fresh pressure on the UK currency. The Cable fell as low as 1.4600 over yesterday’s session however the reduced confidence on the Dollar revealed by the Fed minutes could allow the Pound to mount a correction rally given the right stimulus. A potentially lower NFP reading on Friday could fuel more doubts and allow both the Euro and the Pound to recover against the Dollar.