In the European session stocks struggled for any meaningful direction. The Euro found itself slightly weaker as stronger services and composite PMI data from the UK helped the pound advance, while weaker PMI data from the Eurozone left the single currency wanting. Moves were restricted though and general volume was light through much of the morning.
The excitement started with the US session, where the ADP employment report far exceeded expectations posting 263k jobs added to the economy vs 185 expected. ADP process about 1/5th of all private payrolls so the figure is used as a barometer for Fridays NFP figure. Markets had expected 177k for the NFP figure but that’s likely now been revised upwards. The USD rallied higher on the back of this release as the USD index traded to 3 weeks highs while stocks also pressed to two week highs. This jubilance was short lived however and following the initial rally the USD ran into selling ahead of the release of the FOMC minutes.
This is where things really got interesting, the comments from the minutes suggested several members felt stocks were “quite high”, while the Feds commitment going forward appears to focus on balance sheet reduction, or “quantitative tightening” as some have been dubbing it. Fed officials still felt that gradual rate hikes were appropriate and felt that overall global economic risks were lower. The Fed has almost a $4.5 trillion balance sheet which they plan on reducing late this year, while the median for rate hikes through 2017 remains at 3.
There were several other key events, US house Speaker Ryan suggested the tax overhaul could take longer than the healthcare bill, and we all know how that ended. President Trump heads back to his weekend bolt hole where he hosts Chinese President Xi today and given Trump’s comments on trade, boarder taxes and currency manipulation around China, it is likely to provide some volatility and we’ll be keeping a very close eye on the USD and broader risk sentiment around these talks. Thus far Trump’s meetings with Merkel, May and Abe have created talking points but overall his approach has been softer than his vocal outbursts and critiques and market reactions around these meeting has been limited.
The ECB has been busy this morning with the ECB’s Praet and President Mario Draghi both crossing the wires. The Euro began to slide as Draghi spoke in Frankfurt and his comments suggesting that asset purchases will continue through December and beyond have seen Euro supply through the morning.
EURUSD broke out of its range for the week, pressing below 1.0640 as low as 1.0628 before buyers reemerged. Markets are looking for the ECB to begin tapering and thus far the comments from key members would suggest that policy is unlikely to be changed and we may well even see asset purchased extended beyond December. What happens to the euro will depend on how the market interprets this. For me, current easing is due to end to December, should the ECB continue beyond that date, in any size, it would amount to additional easing not priced into current markets however, with markets so focused on tapering even an extension of easing at smaller volumes appears to fall into their taper view. It’s not tapering. Draghi did point out that inflation risks had steadied and the minutes for last month’s ECB meeting cross the wires later. EURGBP pressed below .8520 on the weaker Euro. Main ranges remain in play. .8480 to .8600/30 hold for EURGBP, while EURUSD continue to look to want to press back below 1.0600 yet buyers are holding it for now.