Fed Doves Push Back, China PMI Next

The Fed hawks eventually won the battle over tapering but the latest skirmishes show doves retaking control. The US dollar weakened after the FOMC minutes while the pound was the best performer on the day.

The minutes of the April FOMC meeting showed the Fed is in no rush to hike rates. Officials are optimistic about the recovery but will wait for clear signs of acceleration or inflation before hiking rates. In the meantime, a dovish bent is emerging on the smaller questions. Dudley spoke out in favor of reinvesting expiring MBS and more whispers are emerging that the Fed will switch its target to reverse repos. The moves show that despite the upbeat public face at the Fed, worries about long-term low growth and inflation dominate.

The dollar fell after the FOMC minutes to cap a volatile day in USD/JPY trading. The pair slid after the BOJ talked about better capex in a move that makes more in July unlikely. The 200-day moving average gave way and the pair sank to 100.82 in Europe. That's near the critical support of the Feb lows and the pair reversed to 101.62. The minutes then sparked a fresh wave of selling down to 101.35.

The euro also made an important technical move, falling to a three month low on a break of 1.3644 that blasted through stops but turned around almost immediately. Weidmann fuelled gains by saying nothing has been decided for the June ECB meeting. The minutes added more fuel to the turnaround and the pair ended at 1.3686.

Overall it was a good day for yen crosses and risk trades as the S&P 500 gained 0.8%.

Up next is the preliminary Chinese manufacturing PMI from HSBC at 0145 GMT. The consensus estimate is for a reading of 48.1. With the Australian dollar under pressure a weak reading would renew the selling pressure.