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A More cautious Fed

What was a tentative dollar correction could well turn into something more sustained after the latest minutes from the FOMC. The two main factors causing the change in dollar tone was a greater concern regarding the global economy (Eurozone in particular) and a view that the stronger dollar was also a headwind for the U.S. economy. Both have combined to leave the dollar nearly 1% weaker overnight on the dollar index and the hurdle to continuing the dollar rally from here has been raised. As we’ve mentioned previously, this correction is not before time and probably welcome by many, as the dollar was looking stretched on many metrics. It’s the yen and less so the euro where the correction on the majors has mostly concentrated, with emerging market FX seeing some gains vs. the dollar, but more from a momentum than value basis, with the South African Rand and Brazilian Real the main gainers so far this week.

Overnight, the Aussie proved fairly resilient in the face of weaker than expected jobs data, which showed employment falling 30k (after revised 32k rise in the previous month), with the rate holding steady at 6.1%. For today, the Bank of England policy decision is announced at midday, but event risk from this is low given that the momentum for a rate increase has waned, even though two members of the monetary policy committee voted for higher rates last month. Otherwise, it’s just weekly claims data in the US, where both 4 and 12 week averages are set to move further below the 300k level, unless there is a significantly higher reading vs. the 295k expectation (last 287k).

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