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Dollar edges up as March Fed cut bets unwind, sterling trims losses after BoE

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Dollar edges up as March Fed cut bets unwind, sterling trims losses after BoE
© Reuters. FILE PHOTO: U.S. Dollar and Euro banknotes are seen in this illustration taken July 17, 2022. REUTERS/Dado Ruvic/Illustration/File Photo

By Alun John and Samuel Indyk

LONDON (Reuters) -The dollar rose slightly on Thursday after Federal Reserve Chair Jerome Powell pushed back against bets of early U.S. rate cuts, while sterling cut losses after the Bank of England said it would need more evidence of slowing inflation before easing.

Meanwhile, the euro fell to a seven-week low while the yen and Swiss franc were steady as traders processed market jitters about U.S. regional lenders.

That left the – which measures the currency against a basket of six major peers including the euro, yen and British pound – slightly higher at 103.63.

It remains close to the recent high of 103.82 touched on Monday of this week and Tuesday of last week, and previously not seen since Dec. 13.

The dollar has been buoyed by U.S. economic data suggesting the Fed can wait longer before cutting interest rates, and Powell gave the currency another push overnight by calling a cut in March “not the base case”.

“I don’t think it’s likely the committee will reach a level of confidence by the time of the March meeting” to ease policy, “but that’s to be seen”, Powell said at a press conference after Fed officials left rates unchanged but dropped a longstanding reference to possible further hikes in borrowing costs.

“The objectives were not to feed March rate cut expectations and keep the (rate setting) Federal Open Market Committee’s options open, and I think they’ve done both of those very well,” said Derek Halpenny, head of research global markets EMEA at MUFG.

The Fed outcome sent U.S. Treasury yields lower, reinforcing a rush to bonds driven by renewed jitters over regional U.S. banks after New York Community Bancorp (NYSE:) crashed 37% on Wednesday to the lowest in more than two decades after posting a surprise loss. [MKTS/GLOB]

The two-year U.S. Treasury yield shed 13 basis points on Wednesday, although it was up 2 bps on Thursday at 4.24%. [US/]

The dollar touched a two-week intraday low at 146.005 yen on Wednesday, but was last little changed at 146.96.

“Dollar yen wouldn’t be where it is without what’s happening (with U.S. regional banks),” said Halpenny.

“If markets regard the knee-jerk response to the regional bank news as an over-reaction, then the less dovish FOMC will be the key story in coming days, supporting the U.S. dollar,” said Sean Callow, a foreign-exchange strategist at Westpac.

The pound cut earlier losses and was last down 0.1% against the dollar at $1.2670 after the Bank of England reiterated that policy would need to stay “restrictive for sufficiently long”, while two policymakers voted to raise rates, pouring cold water on expectations for early interest rate cuts.

However, Swati Dhingra voted to cut interest rates – the first time since August 2008, early in the global financial crisis, that different policymakers have voted to move interest rates up and down at the same meeting.

“While the ECB and the Fed are hinting at rate cuts, the Bank of England’s reticence for these discussions continues to make it stand out as an outlier,” said Kyle Chapman, FX market analyst at Ballinger & Co.

“The most interesting point for us is the expectation that inflation will soon temporarily reach the 2% target before reaccelerating – this suggests that a sharp fall in inflation in the near-term may be less impactful on policy than we would have thought previously.”

The other rate decision on Thursday was from Sweden’s Riksbank, which kept its key interest rate unchanged at 4.00% as expected. But the bank said that if inflation continued to slow it might be able to bring forward the timing of a first rate cut, possibly even to the first half of 2024.

Sweden’s crown weakened after the decision and the euro was last up 0.7% at 11.323 crowns.

Forex

Dollar drifts lower; euro edges higher ahead of key wages data

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Dollar drifts lower; euro edges higher ahead of key wages data
© Reuters.

Investing.com – The U.S. dollar slipped lower in early European trade Tuesday, but remains close to recent highs given the prospects of higher-for-longer U.S. interest rates, while the euro faces a wages test later in the session.

At 04:45 ET (09:45 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower at 104.082. 

Dollar quiet ahead of Fed minutes

The greenback has edged lower Tuesday with U.S. traders set to return after Monday’s Presidents’ Day holiday, but remained close to three-month highs amid mounting expectations that the Federal Reserve will delay the start of its rate-cutting cycle to the start of the summer compared with the expected March at the beginning of the year.

Data released last week showed both U.S. and increased more than expected in January, while Fed official Mary Daly stated on Friday that there is still “more work to do” to bring inflation back down to the U.S. central bank’s 2% target.

The U.S. economic data calendar is largely empty Tuesday, likely resulting in quiet trading ahead of the release of the of the Fed meeting from last month, scheduled for Wednesday. 

“The view that the U.S. data will turn at some point, the Federal Reserve will cut, and the dollar will decline remains a consensus one (and often translates into selling USD rallies),” said analysts at ING, in a note. 

“We favor a strong dollar in the near term as U.S. data remains supportive, but this looks increasingly to be the perfect recipe for range-bound trading.”

Euro awaits ECB wage data

In Europe, traded 0.2% higher at 1.0795, helped data showing the eurozone’s current account in a larger than expected surplus in December, pointing to economic recovery.

Traders are now keenly awaiting the release of regional fourth-quarter negotiated wages data, due later in the session, given the importance Europe’s central bank has placed on wage growth as it attempts to contain inflation.

“This wage indicator had been on a steady rise since mid-2022, and a decline, even if contained, should be welcomed by the ECB,” ING added.

traded 0.1% higher at 1.2605, in quiet trading ahead of the release of the monthly surveys of business activity later this week.

The data is expected to show that British business activity is improving, led by a surge in service-sector activity to its fastest pace since last May.

This follows Friday’s data which showed U.K. grew at their fastest pace in nearly three years in January.

China cuts key rate, yen remains weak

In Asia, traded largely unchanged at 7.1983, helped by a strong daily midpoint fix after the People’s Bank of China cut its benchmark five-year loan prime rate by a bigger-than-expected 25 basis points to 3.95%, a record low. 

The move provided little cheer to Asian markets as it also underscored increasing government anxiety over an economic slowdown in Asia’s biggest economy.

rose 0.1% to 150.31, with the yen weakening past the 150 level as the prospect of a slow exit from the Bank of Japan’s ultra-dovish monetary stance put pressure on the Japanese currency.

Breaks above 150 have attracted government intervention in the past, with officials also offering verbal warnings on any such moves last week.

 

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Forex

Investors are buying back into the pound’s pizazz

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Investors are buying back into the pound's pizazz
© Reuters. FILE PHOTO: Pound and U.S. dollar banknotes are seen in this illustration taken January 6, 2020. REUTERS/Dado Ruvic/Illustration/File Photo

By Amanda Cooper

LONDON (Reuters) – The pound is playing catch-up with the dollar as investors beef up their bullish positions, and may get extra oomph from data this week showing British business activity is among the strongest in the developed world.

Monthly surveys of business activity this week are expected to show the UK topped the league table in February, well ahead of the euro zone and beating even the United States, which in the last year has been one of the few major countries not to have shown a dip into contraction.

This so-called “U.S. exceptionalism” has kept the dollar buoyant and investor confidence in a soft landing for the U.S. economy running high.

Economists polled by Reuters expect an index of British business activity to have risen to 52.7 in early February, led by a surge in service-sector activity to its fastest pace since last May.

Sterling is down just 0.9% against the dollar so far in 2024, having clawed back up from a 1.5% year-to-date loss two weeks ago.

Just four months ago, the International Monetary Fund declared Britain would be the slowest-growing economy among the Group of Seven nations in 2024.

A lot has changed since then, not least Germany tilting into actual recession and France barely growing. Data last week showed the UK, too, registered two straight quarters of negative growth last year.

The euro has fallen to its weakest in six months against sterling, having lost around 2% in value against its cross-Channel rival since the start of the year.

For the past few months, investors have enjoyed the pound’s higher yield that has derived from the view that, even though the economy is sluggish, persistent inflation will mean the Bank of England will have to keep interest rates higher for longer.

Weekly data from the Commodity Futures Trading Commission (CFTC) shows speculators lifted their bullish sterling position to $3.971 billion in the week to Feb 13, just shy of last July’s nine-year high.

Leveraged funds, which include hedge funds and money managers, have aggressively added to their long sterling positions since early December, and now hold their largest bet on a pound rally since October.

Aside from the pound’s yield appeal, investors may be taking heart finally from the data too.

JPMorgan nudged up its 2024 UK growth forecast in January, while Deutsche Bank last week said it had made a modest upward tweak to its quarterly growth estimates.

Bank of America has turned bullish on sterling and last week boosted its year-end target for the pound to $1.37 – some 8.5% above where it is trading right now.

In a note last week, ING issued a reminder not to “get carried away” by signs of green shoots in the economy – the BoE is focussed on services and wage inflation right now – but acknowledged that the outlook for Britain’s economy is starting to brighten.

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Forex

Asia FX creeps lower, dollar firm as China rate cut gives little support

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Asia FX creeps lower, dollar firm as China rate cut gives little support
© Reuters.

Investing.com– Most Asian currencies crept lower on Tuesday amid persistent concerns over a slowing Chinese economic recovery and higher-for-longer U.S. interest rates, while the dollar edged up and remained near three-month highs.

The People’s Bank of China cut its benchmark five-year by a bigger-than-expected 25 basis points to 3.95%, a record low. But the move provided little cheer to Asian markets, given that it also underscored increasing government anxiety over an economic slowdown in Asia’s biggest economy.

The fell slightly after the move, although bigger losses in the currency were held back by a stronger-than-expected midpoint fix from the PBOC. 

Still, the yuan remained close to its weakest level in three months, and was also close to  breaking above the 7.2 level to the dollar. 

Broader Asian currencies were still reeling from a string of stronger-than-expected U.S. inflation readings from last week, which put the dollar within sight of a three-month high. But the greenback saw few cues for movement from a U.S. holiday on Monday.

The and both rose 0.1% each in Asian trade, buoyed by the prospect of higher-for-longer U.S. interest rates in 2024. 

The was among the worst-hit by recent fears of higher U.S. rates, with the currency weakening past the 150 level on Tuesday. The prospect of a slow exit from the Bank of Japan’s ultra-dovish monetary stance also put pressure on the yen.

Still, the yen found some support around 150 as traders watched for any potential intervention in currency markets by the Japanese government. Breaks above 150 have attracted government intervention in the past, with officials also offering verbal warnings on any such moves last week.

The fell 0.1%, even as the showed the bank still remained inclined towards hiking interest rates further to curb sticky inflation.

But the RBA also said that it was prepared to loosen monetary conditions swiftly if the Australian economy cooled too quickly due to pressure from high rates. 

The RBA had kept rates steady at 4.35% earlier in February, but had struck an unexpectedly hawkish tone- which offered some support to the Aussie. 

Among other Asian currencies, the fell 0.1%, while the fell 0.3%.

The firmed slightly below the 83 level, but still remained vulnerable.

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