The Fed may have finally blinked. Remarks from the FOMC inner circle released yesterday suggested that the hawkish monetary posture that dominated  US policy for 18 months is coming to an end.  After 13 consecutive interest rate hikes, the Fed remarked in its minutes for the December meeting that the number of required rate hikes needed to
control inflation "probably would not be large."   Such subtle turn of phrase was enough to rocked the currency market, with the dollar slipping over 200 points against the euro, 150 versus the Japanese Yen and a 255  against the pound. The drop, as we noted yesterday, was the largest one day decline in more than 4 years. 

The question going forward though is the carry trade in jeopardy?  With the futures markets and most analysts pricing in another hike at the January 31st meeting there is perhaps room to squeeze a little more juice out of the greenback.  At 4.5% the dollar will still enjoy a healthy 225 basis point differential against the euro, but with EU economies beginning to perk up the market may be already be looking past the spread. If ECB tightens further the power may shift to the euro as carry trade liquidation accelerates. 

Until the next FOMC meeting on January 31st,  dollar related eco data will be treated delicately by the market with participants likely to pore over every possible effect it may have on board members' decision.  The key event risk this week lies with the Non Farm Payrolls. The figure is expected to print a healthy 200K gain. If it misses materially to the downside, it will only fortify the dollar bear's long held arguments that US expansion is stalling and the rate hike cycle is coming to an end.

Boris Schlossberg is a Senior Currency Strategist at FXCM.