Wednesday, January 8, 2014

FOMC minutes and ADP payrolls | The Single Currency has a decision to make

Two events later today have the potential to move the Foreign Exchange markets: the release of the minutes of the last FOMC meeting, after which the decision to begin tapering, albeit in a very tentative fashion, was announced; and the ADP payroll report, which will hit screens a few hours earlier, around the start of trading in New York.

To begin tapering in December took some market participants by surprise. It is not, apparently, usual for such profound decisions to be taken going into the end-of-year holiday period, and on this occasion it was attributed to the fact that Mr. Bernanke is about to hand over to Janet Yellen as Fed chair, and the committee did not want the market to see what might be perceived as a dramatic “new broom sweeps clean” effect if tapering were to begin after the first meeting of her watch.

One reason for a close parsing of the minutes of the December meeting will be to try to ascertain the trend of tapering to come. Already there are indications, under the much vaunted Forward Guidance principles, that tapering will now take place every month, in relatively small increments and with as much (or as little) verbiage afterwards to attempt to ensure that the eventual ending of Quantitative Easing (QE) is as orderly as possible.

The ADP employment figures, of course, might give some insight into the trend in the unempoyment situation in the US, which is by far the largest consideration when it comes to Fed decisions on a month-to-month basis.

The Euro has a decision to make

A look at the chart at top will indicate that the Euro has, once again, reached or is approaching a significant level in relation to the US dollar. It must be remembered that the trend line drawn on the chart indicates a region where a reversal might happen, rather than a precise point where the current medium-term uptrend has to reverse. However, the fundamental considerations, most notable those just discussed, can be expected to impact on all of this to raise the probability of just such a reversal in the coming weeks and months.

The long term trend in the EURUSD pair is decidedly down. Price has attempted, and failed, to breach this long term trend on no less than two previous occasions since the drama days of the autumn, or as our American friends would have it, the fall, of 2008, when the material well and truly hit the fan. On the downside the rate has been well corralled by the 200 period Simple Moving Average (SMA).

It is always possible that price, on this occasion, will continue towards the previous long-term high, to produce the makings of a new channel rather than a downtrend.

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