The market’s disappointment with the ECB unleashed pent-up corrective forces in the foreign exchange market. This leg up in the dollar began in mid-October. Through the day before the ECB, the euro was the weakest of the major currencies, losing 7.5% against the dollar. The yen and sterling shed a little less than half as much. The Australian dollar was the only one of the majors to have gained against the dollar. And even then, its 0.12% appreciation had only been achieved here in December. Similar, tendencies were evident in parts of the debt markets

The November jobs report was sufficiently strong as to remove a potential risk to the widely held expectation of a Fed hike. Given the light economic calendar, there is little, barring a significant surprise that can impact expectations now. However, the money and risk management behavior that had been started may not be complete. At the very least, it, a period of consolidation is likely in the days ahead.

The issue previously was not if there was going to be a correction but when. Was it going to be after the US jobs data or after the FOMC? Perhaps the ball was initially set into motion by the erroneous claim that the ECB had not cut rates. In any event, we do not expect a new trend to emerge straight away. The damage inflicted on the charts, wallets and egos may take some time to heal.

Our critical assumption is that, technically, the euro is correcting the air pocket entered in mid-October that took the euro from almost $1.15 to $1.0525 shortly before the ECB announcement. It does not mark the end of the dollar bull market. The ECB did, in fact, ease policy, and the Federal Reserve will raise rates. Monetary divergence has not peaked.

The current interest rate differentials mean that savers and investors are paid to be long dollars, and they are likely to be paid more in six months than they are today. While fully appreciating that there can be “buy the rumor sell the fact” and respecting the markets’ anticipatory mechanism, we also recognize that capital markets trend in part driven by the incentive structure for new flows and the management of existing stocks.