Fed & ECB Combine to Crush EUR/USD

ECB chatter about negative deposit rates along with a hawkish bent in the FOMC minutes led to a sharp drop in EUR/USD. On the day, the Canadian dollar was the top performer while AUD and NZD were caught in the risk-off downdraft.

EUR/USD crashed by more than a cent just hours after hitting a two week high. The catalyst was a Bloomberg report saying the ECB is investigating moving the deposit rate to -0.10% if policymakers decide more stimulus is justified. EUR/USD promptly fell to 1.3460 from 1.3540.

The second leg of EUR/USD selling come on a broad USD updraft following the FOMC minutes. There was no smoking gun in the report but traders were looking for discussion of looser forward guidance in the form of lowering the unemployment threshold to 5.5% From 6.5% but the minutes said only 'a couple' members would support such a move.

A separate move to draw a line under inflation had the support of 'a few' members and most supported investigating lower interest on reserves. On tapering, the minutes emphasized data dependency, as usual but saw an 'abatement of headwinds' and that was before the most-recent jobs and GDP reports.

Aside from broad USD strength, gold dropped $32 and bonds fell heavily as taper talk heats up.

The near-term focus now shifts to China with the November flash PMI from HSBC due at 0145 GMT. The consensus is for a slight dip to 50.8 from 50.9 in Oct. A speech from RBA governor Stevens is also out at 0905 GMT.

The other main event on the calendar is the BOJ decision which is out around 0400 GMT. Officials are likely in a wait-and-see mode but don't rule out comments to weaken the yen. If USD/JPY breaks 100.61, upside could quickly materialize.