European equities turned south overnight, after a strong start to the New Year, following positive signs on the inflation front. Inflation in Germany and France have fallen, even below expectations, while energy prices have eased drastically. The shine was taken off recent rallies, as markets consider whether they have witnessed ‘peak inflation’, or if there is still some inflation shocks to come? US markets turned sour, after a strong ADP Job Reports, which indicated the private sector added 235,000 jobs, blowing away expectations. This can be an indicator of the Non-Farm Payrolls numbers and a strong number is seen as a green light to the Fed’s aggressive monetary stance. FOMC minutes confirmed the Fed is ‘taking no prisoners’ with inflation. They intend to continue to raise rates until inflation is completely vanquished and heading back below the target range of below 2%. The US Dollar rallied on the news, with the EUR falling back to 1.0520, while the GBP crashed below 1.1900.
Commodity currencies also suffered the reserve rebound, with the AUD plunging to 0.6750, while the NZD crashed to 0.6200. Australian Services and Composite PMI missed expectations and continues in contraction mode. All eyes are firmly upon the Non-Farm Payrolls number, set to be released tonight and indications are for a strong number. This has a direct impact on the market expectations of Fed actions and higher interest rates.