Dollar Maintains Post-FOMC Minutes Gains

Financial markets were rocked by FOMC minutes overnight as that triggered speculation that Fed could tune, or stop the open-ended QE3 sooner than expected. DOW dropped -108 pts to close below 14000 level at 13927. Gold was shot hard and dropped to as low as 1554 today as it finally took out 1600 psychological level decisively. Dollar index soared through 81 level and is now heading to 81.46 resistance and above. In the currency markets, dollar was broadly higher overnight and the strength carried on to Asian session today. Sterling is particularly weak as weighed down by BoE minutes released yesterday and it broke through an important medium term support level. Yen also rebounded strongly against most major currencies but USD/JPY is stuck in range so far.

The minutes for the January FOMC meeting indicated that policymakers were more upbeat on the US economic outlook as driven by improved business confidence and household consumption. Discussions on continuation of the asset purchase program remained hot. 'Several participants' suggested that the central bank should be prepared to 'vary the pace of asset purchases, either in response to changes in the economic outlook or as its evaluation of the efficacy and costs of such purchases evolved'. 'A number of participants' stated that the program should be tapered or ended before occurrence of a substantial improvement in the outlook for the labor market, in accordance with cost-benefit assessment.

Yet, 'several' members warned of the potential costs of terminating and decreasing asset purchases too soon while 'a few' participants cited past experience of negative impacts on economic growth, employment, and price stability of premature ending of accommodative measures. Besides, there were opinions that the Fed might provide monetary accommodation by 'holding securities for a longer period than envisioned in the Committee's exit principles, either as a supplement to, or a replacement for, asset purchases'.

Looking ahead, PMI data from Eurozone will be the major focus in European session. Manufacturing and Services PMI in Eurozone are both expected to show some improvement in February but stay below 50 level. A major focus is German PMIs as manufacturing is expected to rise from 49.8 to 50. Euro could be pressured if this figure disappoints markets. Also, attention will be on French PMIs while are both expected to show mild improvements. Another focus will be UK public sector net borrowing which is expected to drop GBP -11.3b in January.

From US, CPI will be a major focus as with headline CPI expected to be unchanged at 1.7% yoy while core CPI is expected to moderate slightly to 1.8%. US will also release jobless claims, Philly Fed survey, existing home sales and leading indicators. Strong data would give dollar another round of boost.