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FOMC minutes appear to show divided Fed, ECB minutes due

As suspected the US Federal Reserve’s FOMC minutes painted a picture of a divided central bank, but what was clear is that there is some appetite to pull the trigger on a rate rise in April it is a sentiment that is not shared amongst the majority of the voting members on the committee.

While some have argued that a rise in rates should happen sooner rather than later, given the improvement in economic data it should also be noted that since those minutes were published, a lot of the most recent data has been disappointing on the consumption side pointing to a significant slowdown in Q1 GDP estimates.

“A range of views” was expressed about the likelihood of a move in April, but it is clear that policymakers are concerned about the volatility that has rippled through markets for a good part of this year.

Reading between the lines this makes the prospect of a move in April unlikely and hasn’t shifted the dial higher on the odds of a June hike either, with markets assigning a 19.6% probability of a move before the publication of the minutes, and a 17.6% probability afterwards.

In comments made in the wake of the publication of the minutes St. Louis Fed President James Bullard appeared to give the impression of a man who on the surface appears comfortable with how the US economy is doing, but is walking on egg shells when it comes to taking that extra step and nudging rates slightly higher.

In any case European and US markets finished the day higher yesterday helped in no small part by big 4.5m barrel draws in oil inventory data from both the API and EIA yesterday, as equities reversed some of the damage done by Tuesday’s big falls.

The continued weakness of the US dollar appears to have also created an unfortunate problem for the European Central Bank, pushing the euro to five month highs.

ECB President Mario Draghi’s tone at the last press conference appeared to suggest that interest rates may not be able to go much lower given concerns about European banks fiscal health in an extended period of negative rates. This was reinforced by recent comments from Benoit Coeure when he said rates wouldn’t be pushed into “absurdly” negative territory, though trying to extrapolate an exact number from such an adjective is likely to be tricky.

The publication of today’s ECB minutes might offer some clues as to where the “absurd” threshold is, and whether the ECB discussed any other measures that didn’t end up being implemented at the last meeting.

On the politics front the people of the Netherlands gave their response to their referendum on the EU’s associate agreement with Ukraine yesterday. This saw the Dutch people reject the agreement by an almost 2 to 1 majority on a turnout of over 30%, with 61% rejecting the agreement,  which under the vote rules means that it will be very difficult for Dutch leaders and by implication, EU leaders to ignore it.

That doesn’t mean they won’t try as the EU has form in this area.

As it is the outcome of yesterday’s vote is likely to give a significant boost to the “Brexit” campaign here in the UK, and in that context the EU’s response to it will need to be very carefully managed lest more fire is poured on the flames of populism, which is rippling out through Europe.

With the pound already under pressure yesterday’s outcome could well serve to heighten tensions further over concerns about June’s “Brexit” vote.

The Japanese yen has continued to gain ground across the board hitting multi week highs against its major peers after the Japanese Prime Minister said yesterday that countries should avoid weakening their currencies with arbitrary intervention.   Despite these comments FX markets appear to be a little nervous about the prospect of possible intervention by the Bank of Japan in the wake of recent yen gains.

While this seems sensible from a historical point of view, the yen is still relatively weak when compared to its levels in 2012 and the Bank of Japan has generally tended to adopt a conservative approach to intervention only intervening to slow a move down if it has moved too quickly. Combined with a dovish Fed, talk of intervention seems premature, given the low probability of it being successful but that might change if we fall below the 106.00 level against the US dollar.

EURUSD – continues to look a little soggy for now but while above the 1.1320 area a retest of the 1.1440 area seems likely, with the next resistance at 1.1500, the October highs. Only a move below 1.1030 argues for a move towards 1.0800.

GBPUSD – yesterday’s drop to 1.4005 tripped out a number of stops below 1.4050 before rebounding back through 1.4100 again. This weakness is a concern for a return to the 1.4400 level but doesn’t undermine it completely. We need to get back above 1.4230 to stabilise.

EURGBP – continues to push higher away from the 200 week MA at 0.7945, moving briefly through the 0.8100 area before slipping back. There is significant trend line resistance at 0.8150 from the 2008 peaks at 0.9850. Only a move back below 0.7900 argues for a drift back down towards 0.7820.

USDJPY – continues to drift lower, below the 110.00 level and ever closer towards the long term objective at 106.00. The next support currently sits at the 109.20 area initially. Resistance comes in at the 113.80 area.

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