Minutes from the last FOMC meeting indicated that although Philadelphia Fed President Plosser was the only member to openly dissent and call for a more hawkish Fed, he appears to have a growing number of potential allies. The minutes showed that many members felt that if employment continues to improve, starting to raise rates sooner than currently expected could be appropriate.
Minutes also indicates that the Fed is working on its exit strategy from the record stimulus of the last several years and that members would prefer to reduce the balance sheet at a predictable and consistent pace. Many members also felt that downside risks to inflation are decreasing.
Overall, the market appears to have taken this report to mean that the hawkish faction at the Fed continues to gain strength as the economy improves. The US Dollar took off on the news outperforming both paper and hard currencies, even gaining against GBP which has also been strong today on a hawkish turn at the Bank of England with 2 dissenters at its last meeting.
Market action also suggests that some traders recognize that the Fed moving to back away from stimulus can also be a positive sign, reflecting a stronger economy. Defensive plays like gold and CHF were knocked found themselves all getting knocked back down to the bottom of the pile.
Although European stocks struggled, North American indices rallied in the day with the us30 taking a run at 17,000 while the S&P/TSX climbed to a new all-time high. The smartphone sector attracted particular attention with Apple Inc (NASDAQ:AAPL) touching a new all-time high above $100.00 and BlackBerry Ltd (TO:BB) regaining $10.00.
Resource currencies performed reasonably well on the day, falling less than other majors. CAD and NOK received support from a rebound in the crude oil price on a bigger than expected drop in US inventories. AUD has started to fall again after another attempt by RBA Governor Stevens to try and talk the dollar down yesterday.
With the exception of a speech in Sweden, central bank news takes a day off before the Fed’s big Jackson Hole conference kicks off on Friday with speeches from FOMC Chair Yellen and ECB President Draghi.
For the next 24 hours the focus turns to Flash manufacturing PMI which could influence trading across all regions. For Japan and China, traders look for evidence to justify recent rallies in the Nikkei 225 and the Hang Seng.
For France and Germany traders may be checking for signs of whether the summer slowdown continues, if duelling sanctions with the Russians have had an impact and how much pressure the ECB may be under to do even more to stimulate the economy.
For the US, traders may be looking to flash PMI for signs of whether economic momentum has continued into the summer or not and what that may mean for corporate earnings and interest rates. A flurry of second tier economic releases out of the US tomorrow may also have an influence on trading.
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