Ben Ridgeway Ben Ridgeway
Sales Trader, Client Trading Services, Saxo Capital Markets
08 October 2014

Dollar bulls pause ahead of FOMC minutes

After last week's strong US jobs data, EUR/USD traders will be looking closely at the latest FOMC minutes for clues to when the central bank will hike rates.
  • ​​​​​​EUR/USD falls to 1.2500 mark, its lowest level in two years
  • Markets not swayed by ECB’s new easing measures
  • Latest FOMC minutes due out at 19:00 (BST)​
The 248k US non-farm payrolls figure published on Friday, October 3rd proved higher than market expectations of 215k and led USD to continue the advancements it has been making across foreign exchange markets. The US unemployment rate released on the same day also came in at a six-year low of 5.9% as businesses across the nation appear to have renewed a measure of confidence regarding hiring and investment. This upbeat feeling has rippled through to global markets meaning it is the greenback that sparkles amidst the darker skies of autumn.

Growth of 3% may be seen in the third quarter of 2014, significantly higher that an average closer to 2% over the last two years. Data from the US that carries medium or low level importance are of the type that create the foundations that drive investors from thinking about trading a currency to actually doing so. Personal consumption and spending figures, as well as trade balance data, are three examples of this.

Signs of recovery are not without indications to the contrary and this is evident concerning the manufacturing sector in the US. The growing involvement of the US military in Iraq and Syria also continues to be an issue that has the ability to trigger sharp moves in USD. Worries regarding low inflation are still prevalent, whilst many economists believe that the slack concerning wages across the nation is significant enough to indicate that this recovery is far from over. 

The release of minutes from September's Federal Open Market Committee (FOMC) meeting at 19:00 (BST) on Wednesday, October 8th is expected to reveal that members of the committee are still largely tentative about the problems faced by the US economy. It remains to be seen when Fed chair Janet Yellen and the FOMC will raise the base interest rate in the US and move the economy into a new phase.

What ultimately seems clear is that there have been more coherent signs than ever over the last three months that the US economy, and subsequently the US dollar, is moving in one direction. Markets do not move in straight lines and as such the picture is never crystal clear. Of course there is likely to be obstacles along the way for USD.

 

The European Central Bank failed to "shock and awe" markets with its latest stimulus programme. Instead it has been the US economy's sustained growth and imminent rate hikes from the Fed that has been driving EUR/USD lower.

In Europe, the European Central Bank (ECB) has recently attempted to clarify its views to investors. The announcement at the Governing Council meeting on Wednesday, October 1st stated that it would pursue a programme to purchase asset-backed securities and covered bonds over a period of two years, beginning in the fourth quarter of this year. 

The concern from markets is that banks in individual Eurozone nations may lack the complex level of know-how needed to carry out this process to an optimum level. This highlights underlying fears that the ECB may have difficulty installing a more comprehensive programme of quantitative easing should it need to. Conflicting views from within the Governing Council regarding the tools needed to stem the flow of deflation and stagnant growth are not conducive to the sort of signs of healing that are well underway in the US. 

The steady stream of USD buyers seemed to have come to halt on Monday as far more two-way flow was evident on the trading floor at Saxo’s office in London and throughout the markets in Asia, Europe and the US. EUR/USD plummeted to the 1.2500 mark not seen since August 2012 on Friday, October 3rd. 

Traders of the single currency paid far more attention not only to USD strength, but also to worries regarding the economy in Europe, rather than any positive news stemming from the intentions laid out by ECB head Mario Draghi. Since then, it has been notable that EUR/USD has shrugged off poor data regarding factory orders and industrial production from Germany. It is likely to become evident as we move through October that rather than a case of new found confidence in the Eurozone, the rise in EUR/USD this week is merely a squeeze after what has been one of the most significant USD moves that foreign exchange markets have seen for a long time.​

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