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Though there was some early volatility Wednesday, the Fed seemed to be the unifying element to the risk move. The meeting minutes from the FOMC’s last policy delivered what many stimulus addicts had long feared – an early warning that the quantitative easing build up has peaked and the world’s most effective market supporter (manipulator if you’re a skeptic) is ready to start withdrawing support. In the statement, the most disconcerting remarks were that a “number” of the FOMC members though tapering QE may become necessary; “many” were concerned about the risks of more QE; and “several” said they should be prepared to “vary” the past of stimulus. Curbing the endorphin-flood of stimulus is not a cold turkey move, much less a move to tighten; but it exposes expensive markets against troubled growth.

British Pound Collapse Continues as BoE Reassures Bears

The pound has already made incredible, self-defeating strides over the past month; but the currency’s collapse this past session certainly vaulted it above the yen for sharpest decline. Having plowed below a four-year rising trendline just this past week, GBPUSD still managed to one-up itself Wednesday with the biggest daily drop since December 28, 2011. Of course, the dollar’s own strength contributed to this move; but the sterling lit its own match. In the London session, there were two pieces of key event risk: the labor data and BoE minutes. Jobless claims for January dropped more than double what was expected. Yet, that didn’t even register with sterling traders who simply unloaded when it was reported that BoE Governor King and two other central bankers called for another 50 billion in stimulus. Though voted down, this growing consensus for proactive easing suggests the UK central bank will attempt to ‘catch up’ and has plenty of room to deflate the pound.

Euro: Will EUR/USD Resist the Risk Slump and Hold its Bull Trend?Like most other risk sensitive currency pairs, EURUSD fell this past session. However, the benchmark currency pair has yet to turn the prevailing bull trend that dates back to July. In a severe risk aversion move that spans the entire financial market, this pair will succumb just as any other asset would. On the other hand, if the situation isn’t as virulent as doomsdayers fear, the euro will be able to hold its own better than most. In the upcoming session we have February PMI figures – GDP proxies – for which the bar is set low. But, it’s Friday’s LTRO2 repayment I’m watching.

Japanese Yen Tested by Sentiment, A Long Time Until Next Stimulus Event

Things are getting hairy for Japanese officials. Their perfectly crafted effort of threats and actual policy adjustments to drive their currency down over 20 percent in the past five months is under attack. If risk aversion kicks in, the carry-heavy yen crosses will be overwhelmed. Intervention policy can’t hold back such an element influence - especially given the yen’s move and the time frame until the key April BoJ meet.

New Zealand Dollar RBNZ Reaction Exaggerated by Carry Drop

It was another case of fundamental leverage for the New Zealand dollar. Unfavorable risk winds later Wednesday, the day started off with a kiwi-specific hit when RBNZ Governor Wheeler revealed that he was not above threatening his currency into submission. His suggestion that he could intervene to hold the kiwi was far from a BoJ-like effort, but it is a serious threat from a currency that is wholly an investment currency.

Swiss Franc: What Will Signal the EURCHF Return to 1.2000?

What would it take to drive EURCHF back to 1.2000 and raise the ire of the Swiss National Bank? Would risk aversion alone bolster the franc, or would we need that sentiment erosion undermine the Euro-area’s financial security and revive the Euro-Swiss flight-to-safety flow? If the ECB caves to pressure for more stimulus, it would likely signal to FX traders that the elements are there for EURCHF to drop back to its floor.

Gold Ignores Currency War Threats, Plummets Below $1,600

We have heard South Korea’s income President vow to take preemptive action to offset the impact that yen’s depreciation has on exports and RBNZ Governor Wheeler threaten to cap the kiwi. But this further manipulation of exchange rates didn’t seem to boost the appeal of gold. Before the Fed indicated it could cut back on QE, gold was already on fire. Let’s see if demand for safety can help the metal off its eight-monthlows.

**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

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--- Written by: John Kicklighter, Chief Strategist for DailyFX.com

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