Forex - Dollar in Demand; Sterling Could Be Volatile

30 January 2020, 16: 28

The U.S. dollar remains in demand Thursday, after the Federal Reserve did nothing to signal any near-term easing of policy despite issuing a statement that was seen as slightly less confident about the economic outlook.

However, sterling could be the currency to keep an eye on in early trading in Europe, as the Bank of England meets to decide on its monetary policy.

 

 

At 03:00 ET (0800 GMT), the US Dollar Index Futures, which tracks the greenback against a basket of other currencies, pushed up 0.1% to 97.895, trading near a two-month high.

 

 

The greenback is the best performing currency among G10 currencies in January, with the dollar index rising 1.6% so far this month. Commodity currencies such as the loonie and Aussie have suffered most, due to fears for Chinese growth amidst a spreading coronavirus outbreak.

 

Overnight China's National Health Commission said the total number of confirmed deaths had reached 170 as of late Wednesday, with the number of infected patients approaching 8,000. Infections have been reported in at least 15 other countries and in every province of mainland China.

 

This virus outbreak has resulted in weakness in many emerging currencies, with investors seeking out the safe haven status of the dollar. The offshore Chinese yuan briefly touched 7 to the dollar again overnight before strengthening just above that level later.

 

Elsewhere, sterling could be volatile Thursday, with a degree of uncertainty surrounding the meeting of the Bank of England’s Monetary Policy Committee.

 

At 03:00 AM ET (0800 GMT), GBP/USD traded at 0.2% lower at 1.3001, and EUR/GBP 0.2% higher at 0.8468.

 

 

At the start of the year the Bank of England was widely expected to cut interest rates at this meeting. A number of MPC members, including Governor Mark Carney, had spoken publicly about the weak state of the U.K. economy given the uncertainty surrounding the country’s exit from the European Union, which comes into effect on Friday.

 

 

However, economic data since then have been generally more positive than expected. For example, the services purchasing managers’ index – a gauge of the health of the country’s dominant sector – came in at 50 in December, ahead of a widely predicted reading of 49.2.

 

“Despite a few economic data releases that came out stronger than expected, we still expect the BoE to cut the Bank Rate by 25bp,” said analysts at Danske Bank, in a research note.

“ However, it is likely to be a close call, which is also reflected in market pricing, as investors are pricing a 45% probability of a cut, leaving some upside in EUR/GBP if we are right in our call,” the bank added.