Dollar Holds Steady as Investors Assess US Economic Data Ahead of Fed Meeting
The dollar remained stable on Monday as investors evaluated U.S. economic data in anticipation of the upcoming Federal Reserve policy meeting. However, escalating geopolitical tensions in the Middle East limited risk sentiment. The dollar index, which measures the U.S. currency against six rivals, showed little change at 103.53, close to last week’s six-week high of 103.82. This index is set to gain 2 percent in January as traders adjust their expectations of early and substantial U.S. interest rate cuts.
In December, the Federal Reserve surprised the markets by adopting a dovish stance, leading traders to anticipate aggressive easing and an early rate cut, possibly as soon as March. However, strong economic data and resistance from central bankers have caused traders to revise their expectations. The CME FedWatch tool currently shows a 49 percent chance of a rate cut in March, compared to an 86 percent chance at the end of December.
Lloyds Bank economist Nikesh Sawjani stated that speculation about the near-term path for interest rates continues to be the primary driver of financial market movements. He added that the U.S. economy is still performing better than expected, despite declining inflation measures, which suggests that rate cuts are not urgently needed.
Investor attention this week will be focused on the Federal Reserve’s policy announcement on Wednesday. It is widely anticipated that the central bank will maintain its current rates, shifting the spotlight to Fed Chair Jerome Powell’s comments. Roberto Mialich, a global FX strategist at UniCredit Bank, expects the Fed to refrain from rushing into rate cuts at this meeting, which would likely keep the USD strong across the board.
The euro experienced a 0.1 percent decline against the dollar, trading at $1.0838. It is on track for a nearly 2 percent decrease for the month. The European Central Bank (ECB) recently decided to maintain interest rates at a record-high 4 percent and reaffirmed its commitment to combating inflation. However, traders are increasingly betting on the ECB cutting interest rates starting in April, with expectations of around 140 basis points of easing throughout the year. ECB Vice-President Luis de Guindos stated that the central bank will eventually reduce interest rates due to recent inflation developments in the eurozone.
Sterling remained flat at $1.2703 ahead of the Bank of England’s policy announcement on Thursday. The Japanese yen strengthened to 147.865 per dollar but is expected to experience a nearly 5 percent decline in January, its weakest monthly performance since June 2022. This shift in performance is due to traders adjusting their expectations of when the Bank of Japan will exit its ultra-loose policy.
Sid Mathur, head of Asia macro strategy and emerging market research at BNP Paribas, noted that positioning became net long JPY towards the end of December, driven by expectations of aggressive Fed easing and rapid BOJ policy normalization. However, these expectations have been scaled back in recent weeks, leading to a reduction in JPY longs.
In terms of geopolitical risks, investors are cautious following a drone attack near the Syrian border that killed three U.S. service members. Analysts suggest that these geopolitical tensions could temporarily boost the safe-haven yen.
