It has been another quiet morning in the foreign exchange market with risk aversion and deleveraging driving the dollar slightly higher against all of the major currencies. There is no major U.S. economic data on the calendar today but fundamentals matter once again with the GBP slipping on softer retail sales numbers and the EUR hit by lower German factory orders and Eurozone retail sales. Profit taking on long USD/JPY positions also drove the currency pair lower while the AUD/USD declined after a wider trade balance. According to NFIB, Small Business Confidence increased slightly in the month of December. This improvement is encouraging because it shows that businesses did not become more pessimistic last month despite the uncertainty about the Fiscal Cliff and Obamacare. However the increase is small considering that the index dropped steeply in November.

Since the main focus for the dollar this week will be the speeches from Fed officials, we want to take this opportunity to update our dove / hawk scale for the Federal Reserve this year. Jeffery Lacker will be speaking at 3pm this afternoon on the economic outlook and as an outspoken hawk, there’s a very good chance he led the call to end asset purchases this year. However, Lacker is not a voting member of the FOMC in 2013, so his ability to influence monetary policy will be limited.

On balance, the 2013 Federal Reserve will be more dovish, making the chance of an early end to asset purchases less likely. The committee gains 2 major doves (Evans and Rosengren) and loses one (Williams). The most hawkish member of the FOMC in 2012 (Lacker) will also be a nonvoter this year and will be replaced by a more moderate hawk (George). The real wild-card is St Louis Fed President Bullard who has both supported Operation Twist and a timeline for keeping rates low. These new members will have their first opportunity to vote on monetary policy at the January 25th FOMC meeting.

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