Yesterday was all about consolidation and a day where it really did feel like we were in the lull of summer markets. There are plenty of larger risk events on the table from the FOMC minutes last night, ECB minutes today and Non-Farm payrolls tomorrow, so most were likely just happy to sit on the sidelines until these events have passed. The USD had traded firmer on the day through much of the session but gave back some gains post FOMC minutes. The minutes were slightly more cautious than previous accounts, but overall reaction was quite muted. In the UK the pound had a mixed performance. Marginally weaker than expected services PMI figures saw sterling slip against the USD, while it was slightly firmer vs the euro. The single currency was a slight under-performer, however much focus will be on today release of the ECB minutes from the June meeting, if tapering was not in the discussion, we may have additional euro downside ahead. Broader risk was firmer, we saw European stocks trade higher, as did major US indices, while overnight in Asian trading, major indices were more or less flat give or take .1%
Last night’s FOMC meeting passed with little excitement. The USD gave back moderate gains earned through the day but it was hardly classified as a sell off. US rate hike probability also didn’t really change and we still see a 23% chance of a hike in September with 56% in December. FOMC members appear split on when exactly they are going to start their balance sheet adjustment with several members wanting it to begin as soon as next month, with others preferring to wait and gauge the impact of data and inflation. Some concerns were expressed about the value of assets, most notably equity markets in the US. This is not the first time the Fed have expressed this issue and it is very surprising to see US indices still pressing to record levels however we may disagree with the value of something, we can’t argue with its direction.
Today in the US session, we’ll be looking at the Non-Manufacturing ISM release which covers the service sector in the US. A slight slowdown in the pace of growth is expected and may well keep USD subdued unless it’s a firmer print than expected. The ADP employment report is also due for release, 185k jobs are expected to be added to the US economy through June, this will simply serves a barometer for the NFP figure tomorrow.
In the Eurozone the single currency has faced some selling this week. Data has been relatively decent vs expectations while ECB chat has been quiet. Yet the euro has declined against both USD and GBP this week. The latter two are outperforming the single currency and we are not seeing broad based euro weakness, but today’s release of the ECB minutes could well put that to the test. The euro has rallied on expectations that the ECB will be looking to scale back on their bond buying program especially in the last two weeks as Draghi’s comments have been perceived by markets in this manner. Should the ECB minutes not support this view, then we may well see selling in the euro accelerate .8750/57 still offers an area of support for EURGBP, a break below will see additional support around the .8737 area but we’ll be looking for a break to signal a move back towards .8650/60. This .88/8810 area has plenty of sellers but above that .8880 will more than likely hold any move higher.
EURUSD has been grinding lower since 30th June. We really need to see a move below 1.1285 to get back into lower rotation but with the stronger USD showing this week, and the euro exposed to downside risk a break could see moves down to 1.11322, while 1.1220 offers some support ahead of that. 1.1426 provides upside resistance to any moves higher.