Forex Analysis: Looking Past German Jobs Data, Focus on Fed Minutes

Forex markets are likely to look past a status-quo German jobs report to focus on minutes from December’s Federal Reserve monetary policy meeting.

Talking Points

Euro Volatility Unlikely on Status-Quo German Unemployment Report
Dollar May Find Beginnings of New Dynamic in December’s FOMC Minutes
Japanese Yen Outperformed in Asia as Markets Digested Fiscal Cliff Deal

The European economic calendar seems to offer little scope for significant volatility. German Unemployment data is in focus, with the economy expected to shed 10K jobs in December. While such an outcome would mark deterioration compared with November’s 5K print, it would fall largely within trends established over recent months, meaning its ability to meaningfully shift ECB policy expectations (and thereby the Euro) is likely limited.

On balance, traders are likely to be most interested in minutes from December’s Federal Reserve meeting. Ben Bernanke and company opted to expand quantitative easing to $85 billion per month in outright purchases and adopted the so-called “Evans rule”, linking the path of interest rates to the unemployment rate and inflation expectations.

While pickup in balance sheet expansion seemed to push the Fed further to the dovish side of the spectrum, the “Evans rule” established a clearly-defined stimulus exit strategy for the first time since the Great Recession. Traders will be keen to parse the reasoning behind the strategy shift, with a particular eye to the possibility of a sooner-than-expected withdrawal of accommodation.

Critically, the possibility of earlier stimulus withdrawal may mark an important change of pace for the US Dollar. The inverse correlation between the benchmark currency and the S&P 500 has materially weakened since early October. A chance at the (very early) emergence of yield-based support may further erode the relationship, potentially feeding the beginning of a new stage for the Dollar where prices react positively to improvements on the US growth front.

The Japanese Yen outperformed in overnight trade, correcting higher as markets digested yesterday’s sharp selloff in the wake of US policymakers’ last-minute deal to avert the so-called “fiscal cliff”. The similarly haven-linked greenbacklikewise fared well, adding as much as 0.2 percent on average against its leading counterparts.

Asia Session: What Happened

GMT

CCY

EVENT

ACT

EXP

1:00

CNY

Non-manufacturing PMI (DEC)

56.1

–

55.6

Euro Session: What to Expect

GMT

CCY

EVENT

EXP/ACT

IMPACT