FOMC Minutes Could Change Market Behavior to the Old

The USD has continued to strengthen overnight as the markets have reacted to the release of the FOMC minutes yesterday afternoon that stated most of the policy makers anticipate a possible end to quantitative easing (QE), sometime this year.  According to the minutes, “a few members expressed the view that ongoing asset purchases would likely by warranted until the end of 2013”.

Since we have received a clearer defined basis from the FED of forecasting the direction of monetary policy, there are analysts stating that the USD will begin to trade on US economic data instead of risk trends. 

The minutes also revealed that “several other  members thought that it would probably be appropriate to slow or stop purchases well before the end of 2013, citing concerns about financial stability or the size of the balance sheet”.

This news just continued to fuel a dollar rally that has existed since the beginning of the year and gave some confidence to those buying the USD and selling currencies.  The initial post fiscal cliff selloff of the dollar seems now to have been a “knee-jerk” reaction.  The EUR seems headed for a test of the 1.3000 level and GBP looks to try 1.6000.  USD/JPY has broken the 88 level, while AUD and CAD are feeling the pressure as well.

As we head into the North American trading session, all eyes are focused on the release of the December US employment numbers.  Analysts are calling for non-farm payrolls to rise 150,000 for December compared with an increase of 146,000 in November.  The unemployment rate is expected to remain unchanged at 7.7%.  There are some who say the NFP number may be even higher, after release of yesterday’s ADP report showed a 215,000 gain in private jobs in December.  The market expectation had been for a rise of 138,000.  The ISM manufacturing employment component also was higher coming in at 52.7 for December after a 48.4 number in November.  The initial jobless claims 4 week moving average also improved falling to 360,000 on December 29, down from 406,000 the previous month.

All this has set the market up for today’s 8:30 am, EST release.  Since we have received a clearer defined basis from the FED of forecasting the direction of monetary policy, there are analysts stating that the USD will begin to trade on US economic data instead of risk trends. 

Better data, higher USD. 

If that is in fact the case, and the US economy does rebound in 2013 as many expect it will, this could be the beginning of a strong year for the dollar.

As far as the currencies go, EUR is once again looking to test the 1.3000 psychological level.  A break there would test support at 1.2985 and target 1.2950.  Resistance is seen at 1.3050.  Keep in mind, this isn’t a one way street and the market looks to be oversold at the moment.  A disappointment in the NFP number could reverse the EUR trend and send it to 1.3100.  Or the NFP number could disappoint and traders could look at this as a “risk off” event and continue to buy USD.  It isn’t as if the EUR gives confidence as a safe haven currency.  It should also be noted that the market was well long EUR at years end and is still unwinding those positions.

Further reading: See how to trade the Non-Farm Payrolls with EUR/USD.

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