Forex today: big turnaround post hawkish FOMC minutes, but why?

The FX space was lively today with key events taking place in the US session, dominated by the FOMC minutes. 

Markets were looking out for commentary around the Fed's balance sheet and their intended action for this year. Federal Reserve officials agreed at their March policy meeting that they would likely begin shrinking a $4.5 trillion portfolio of Treasury and mortgage securities later this year. However, there was very little detail of how this would be carried out or how quickly they aim to reduce their holdings. 

While the minutes were hawkish, the market was disappointed with the outcome and the dollar eventually sold off along with yields and stocks. "One explanation for the reaction to the minutes is that tapering is deemed negative for risk sentiment, hence the lower treasury yields and equities. It also suggests a slower pace of tightening," suggested analysts at Westpac.  The most notable benefactor was the yen, dropping to fresh lows of 110.53 and meeting the overnight support. The euro rallied from an initial 1.0633 low to 1.0681. Sterling reversed the losses to 1.2446 and scored a high of 1.2497. The Aussie remains out of favour with markets and reversed post FOMC minute's gains from 0.7584 to 0.7565. The NZD remained with the bid to 0.6984 highs and 40 pips higher than the lows. 

Elsewhere, analysts at Westpac noted that the ADP employment rose 263k in March (185k expected). "Gains were broad-based: goods producing employment rose 82k, services +181k., construction +49k, manufacturing +30k, mining +4k, professional and business services +57k, leisure and hospitality +55k, and healthcare +46k. The strong report adds upside risk to Friday's payrolls outcome."

Day ahead

The day ahead is looking quiet on the calendar with the only notable data from China in the Caixin China Services PMI. These are expected at 53.2 vs  52.6 pervious. RBA's Debelle who is the Assistant Governor (Financial Markets) at the Reserve Bank of Australia will also be speaking again. He will give a speech on ‘Recent Trends in Australian Capital Flows’ at the AFR Banking and Wealth Summit.

Key notes from US session:

• US dollar index reverses and tumbles after FOMC minutes
• No light shed on the relationship between the Fed's balance sheet and the rate adjustment cycle - BBH
• CME Group FedWatch: Market expectations for a June rate hike at 62.7%