The balance of risks fell to the U.S dollar overnight with market participants largely uninspired by the Fed’s decision to stay on the stimulus sidelines. While the Fed kept rates at record lows and reiterated interest rates are likely to remain at “exceptionally low levels at least through late 2014,” the statement failed to provide clear and immediate relief for those expecting further stimulus. The ensuing correspondence did however keep the dream of QE3 alive with the statement showing the board are willing to “provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability”.
FX risk trends displayed disappointment in the period to follow with the US dollar a natural beneficiary. After consolidating higher before the release, the Aussie dollar hit the skids with an immediate drop through 105-figure before bottoming out just below 104.5 US cents throughout the session. The Euro followed a similar trajectory, falling from around 1.23-figure before finding support above the 1.2215 levels. Earlier, the latest ISM release also provided another less than convincing view of the health of U.S manufacturing with the gauge edging higher to 49.8 in July, but remaining in contraction territory. Forecasts called for the stronger gains to 50.2. A slight concession was the earlier release of ADP employment data which added 163,000 new private sector jobs in July, outpacing expectations of 120,000 new positions. This is seen as a positive precursor ahead of Friday’s Non-farm payroll data.
With the FOMC in the rear view, markets now move to this week’s next significant risk event with the European Central Bank policy meeting this evening, and the bank has a lot to live up to. It’s clear, markets have priced in a grand effort by Europe’s elite, which is expected to involve further ECB intervention to bring down borrowing costs in Europe’s periphery with a broad range of other possible policy initiatives also gaining traction. Whatever the ECB may bestow, markets are in high expectancy mode, suggesting an imminent need for follow-through to keep the Euro at the very least on a stable course. Mario Draghi’s pledge to do “whatever it takes to preserve the euro” has inspired a material shift in sentiment, but if markets walk away unappeased, as in the case of last nights FOMC decision, it’s likely to spark a larger bout of top-tier risk aversion with the Euro the first in the firing line.
The domestic session will see the release of retails sales and trade balance data take the spotlight. June sales are expected to see seasonally adjusted growth of 0.7 percent in June, from a previous rise of 0.5 percent, while the trade deficit is forecast to widen from AUD285 to 375 million.