Fed Minutes Trigger Panic

The minutes of the Fed’s latest meeting released yesterday indicated that some policymakers expect the current monetary stimulus to expire before the end of 2013. This hawkish stance of US policymakers highlights their growing reticence over further expanding the central bank's balance sheet and has triggered a sell-off in high yield currencies today. However, all eyes are expected to shift to today’s US non-farm payrolls data to gauge the impact of deteriorating sentiment among employers on account of the delay in sealing the fiscal cliff deal. At home, data released today indicated that the dominant services sector PMI unexpectedly contracted for December, painting a gloomy picture of the UK economy.

Pound Sterling – UK Markets

Sterling has continued to trade close to yesterday’s highs against the Euro, but slipped below the 1.61 mark against the greenback, as traders turned risk averse after minutes of the Fed’s latest meeting indicated that policymakers expect the central bank to wind up its current monetary stimulus programme in 2013. The British economy has started 2013 on a weaker footing with activity in the dominant services sector showing signs of contraction. Meanwhile, in line with other surveys, the BoE’s data today showed that mortgage lending in the UK continued to climb, broadly supported by the lending scheme initiated by the central bank. Similar trends emerged from the central bank’s latest quarterly credit conditions survey, which showed that credit to households rose significantly in the final quarter of 2012, setting a new high since the survey began. With no further economic data slated for release today, the BoE’s monetary policy meeting and other domestic releases scheduled next week will remain key triggers for the Pound.

US Dollar – US Markets

Although the Fed Chief, Ben Bernanke, had earlier indicated in his press conference that the Fed’s current stimulus programme would be pegged to the nation’s unemployment and inflation rates, some voices from policymakers expressed concerns over the notion of keeping monetary stimulus alive until the end of 2013. The greenback received support against the majors this morning, as the hawkish views have fed speculation that the current monetary stimulus programme would end sooner than earlier envisaged. Meanwhile, today’s much awaited employment data is projected to show that hiring in the US remained steady for December, while the unemployment rate is expected to stay at 7.7%, well below the Fed’s target rate of 6.5%. However, with the recent ADP data signalling a sharp improvement following Hurricane Sandy, some market participants expect today’s employment figures to outpace estimates. With manufacturing activity in the US once again gathering momentum for December, markets will also focus on today’s ISM services index for a clearer picture regarding the overall health of the US economy.

Euro – European Markets

The Euro has continued to lose ground against its major peers in today’s trading session, with the common currency nudging closer to the 1.30 mark against the US Dollar, largely spooked by minutes of the Fed’s latest meeting, which indicated that policymakers in the central bank were open to the idea of ending the current stimulus programme before the end of 2013. Additionally, data released earlier today showed that service sector activity across Europe continued to remain under pressure for December. However, another set of data indicated that retail sales in Germany were upbeat, largely supported by a low unemployment rate. Meanwhile, with the ECB President keeping alive hopes of negative deposit rates, today’s Eurozone consumer price inflation data is likely to be key in gauging the stance that the ECB plans to adopt during the course of the year. However, the crucial non-farm payrolls report from the US is expected to provide direction to currency markets in today’s trading session, while next week’s ECB monetary policy meeting and key set of leading indicators from the Eurozone are likely to influence near term direction.

Other Currencies – Highlights

The Aussie Dollar declined against the greenback in today’s session, as minutes of the US Fed’s latest meeting showed that policymakers in the central bank believed that the current monetary stimulus should end in 2013. Additionally, data from the Australian Industry Group/Commonwealth Bank revealed that Australia's services sector contracted at a faster pace for December, hurt by decline in discretionary household spending. With no major domestic data scheduled today, traders will keep a close eye on today’s non-farm payrolls data from the US for further direction to high yield currencies. Meanwhile, trade balance and retail sales data from Australia, scheduled for release next week, are likely to provide some major domestic triggers to the Aussie Dollar.