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Forex - Dollar Stays Firm; Powell Not Moved by Virus

Published 12/02/2020, 08:02
Updated 12/02/2020, 08:39
© Reuters.
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Investing.com - The U.S. dollar continued to show strength Wednesday, helped by comments from the head of the U.S. central bank that the outbreak of the deadly coronavirus in China has done little to alter the expected path of U.S. interest rates.

At 03:10 ET (0810 GMT), EUR/USD traded at 1.0916, just off Monday’s four-month low. GBP/USD traded at 1.2969, just 0.1% higher. The U.S. Dollar Index, which tracks the greenback against a basket of six other currencies, stood at 98.627, up 0.1%, approaching the levels last seen in mid-October.

Overnight, U.S. Federal Reserve Chairman Jerome Powell said in remarks before U.S. lawmakers that the central bank is closely monitoring the fallout from the deadly coronavirus outbreak in China, “which could lead to disruptions in China that spill over to the rest of the global economy.”

However, Powell stopped short of saying the disease had changed the central bank baseline outlook for the U.S. economy.

“The FOMC believes that the current stance of monetary policy will support continued economic growth, a strong labor market and inflation returning to the committee’s symmetric 2% objective,” Powell said. “As long as incoming information about the economy remains broadly consistent with this outlook, the current stance of monetary policy will likely remain appropriate.”

The January 2021 Fed funds futures currently suggests the market is pricing in at least one rate cut of 25 basis points by the end of 2020, but employment growth has been a lot stronger than expected over the last couple of months and sentiment surveys have tended to surprise to the upside.

Even if the Federal Reserve does make a quarter-point cut this year - one is fully priced in by September - a base rate of then 1.5%for fed funds would still be considerably higher than what most other developed market central banks can offer.

The flip side of dollar strength is the weakness of the euro.

EUR/USD continues to be weighed down by concern about the coronavirus and its impact on the eurozone economy,” said analysts at ING in a research note. “At this point, a break below the 1.0900 mark (also, a multi-year low) seems in the cards, especially as we expect a round of grim eurozone data this week.”

The first grim data point is likely to be the December industrial production figure for the euro zone, at 05:00 AM ET (1000 GMT), which is expected to have fallen by 1.6% month in December, an annual fall of 2.3%.

Also of note, Sweden's central bank left its benchmark interest rate unchanged, as expected, after surprising the market by raising in December by 25 basis points to 0%, ending five years of negative rates.

"The minutes from the December meeting emphasised that the Riksbank could cut rates again if needed," said ING, "although in reality we think the bar to either cut, or indeed hike rates anytime soon is set relatively high."

Thus any move would have an impact of the Swedish krona. At 03:10 AM ET (0810 GMT), EUR/SEK traded at 10.5076. The krona has risen around 0.3% against the euro since the Riksbank hiked.

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