FOMC minutes wrong foot the market

We have the makings of another busy day today after last night’s FOMC minutes showed an increasing disquiet among certain policymakers about the life cycle of unlimited asset purchases, and the possibility of tapering asset purchases soon than the markets had anticipated.

Given recent comments from Bullard and George this shouldn’t really have come as too much of a surprise, however the market reaction had all the hallmarks of a baby spitting out its dummy, as equity markets dropped, while the US dollar jumped sharply.

Markets will be particularly interested to hear what James Bullard has to say later today in New York in light of these minutes; however anyone thinking that the Fed is about to pull the plug had better think again, though the change of dynamic could prove to be interesting, and will give markets something else to chew over in the coming months.

As such we expect to see European markets open lower this morning and the question being asked is whether we could be about to start a correction lower, especially with the uncertainty of this weekend’s Italian election starting to loom large.

This morning’s latest French, German and Euro manufacturing and services PMI’s for February should provide a test early on with the German measures expected to continue their recent rebounds into expansion territory, above 50.

The last set of figures started to show the beginnings of a divergence between the German and French indicators, and if this trend continues then we could well see concerns rise about the state of the French economy with speculation rising that the expected growth for 2013 will be revised sharply lower from 0.8% to 0.3%.
French manufacturing is expected to come in at 43.8 and services at 44.4, a slight improvement on last week’s number.

The broader Eurozone PMI measure is expected to improve slightly as well to 49 for services and 48.5 for manufacturing.
Later on we have another Spanish 10 year bond auction as the Spanish treasury continues to take advantage of the lower rates. The previous auction saw yields of 5.29% with a bid to cover of 2.3.

The pound took another hammering yesterday despite more positive news on the unemployment front; however it was the Bank of England minutes that pulled the rug from under the pound. The surprise decision by Mervyn King and Paul Fisher to throw their hats into the QE corner of David Miles and push for an extra £25bn of QE caught the markets off-guard, and given some of King’s recent comments about reaching the limits of monetary policy, the change of heart could well be construed as bearing some of the hallmarks of desperation.

Certainly gilt markets were unimpressed, with prices initially surging, before sliding back just as quickly, and finishing the day lower. It would appear that investors aren’t as enthusiastic about buying UK gilts as they were six months ago which is a concern given today’s 10 year gilt auction. The last auction saw yields of 1.9% and a BTC of 2.9.

Today’s public sector borrowing numbers for January could offer some comfort with a £9bn surplus expected given that it is the final month for the settlement of all tax bills, and traditionally a strong month for revenues. A miss here and we can pretty much rule out the Chancellor even getting close to his borrowing target for this fiscal year.

In the US weekly jobless claims are expected to rise from last week’s surprisingly strong 341k to 355k, while the Philadelphia Manufacturing for February is expected to improve from -5.8 to 1.

EURUSD – having squeezed back to 1.3430 yesterday we subsequently dropped sharply post FOMC and have dropped through trend line support from the 16th January lows at 1.3315 on our head and shoulders pattern. This could well precipitate a move towards 1.2900, though we have to head towards long term trend line support at 1.3190 from the 1.2045 lows which remains the major line in the sand for this uptrend.
While below 1.3520 and the 200 week MA the bias remains for a move lower and also keeps the bearish weekly candle scenario of two weeks ago alive.

GBPUSD – yesterday’s sharp move lower took out the 1.5270 June 2012 lows, pushing briefly below 1.5200 and opens up the possibility of a move towards 1.4950, the July 2010 lows.
Resistance is now expected to come in between 1.5270 and 1.5300, and above here could squeeze back towards 1.5480.

EURGBP – yesterday’s push higher stalled at the 0.8770 area trend line resistance from the October 2009 highs. It also negated the bearish weekly candle from two weeks ago. Above here targets a series of highs in July/August 2011 at 0.8880.
The 0.8580 area continues to remain the key support. We need to get back below 0.8580 to retarget a move lower towards the lows of last week at 0.8460.

USDJPY – the US dollar continues to struggle to get through the 94.00 level and as such the corridor remains intact between 92.20 and 94.20 with a break out either side likely to suggest a sharp 200 point move higher or lower.
Below 92.00 suggests a move towards the 90.30 level and 29th January lows. A move through 94.00 targets the 95.00 area and 2010 highs.