©Reuters. File photo: This illustration taken on July 17, 2022 shows US dollar and euro banknotes.Reuters/Dado Ruvic/Illustration/File photo
Written by Uncle Banerjee
SINGAPORE (Reuters) – The dollar started the week on steady footing as investors weighed U.S. economic data ahead of this week’s Federal Reserve policy meeting, while geopolitical developments in the Middle East weighed on the dollar. Rising tensions subdued risk sentiment.
The U.S. currency rose 0.01% to 103.55 against the U.S. dollar against six rival currencies on Monday, forecasting a 2% rise in January as traders tempered expectations for an early and deep U.S. interest rate cut.
The Fed surprised markets in December by going dovish and predicting a 75 basis point rate cut in 2024. As a result, the market is pricing in early significant easing, with interest rate cuts expected to be implemented as early as March.
But since then, strong economic data and pushback from central bankers have led traders to adjust their expectations. The market is currently pricing in a 48% chance of a March rate cut, compared to an 86% chance at the end of December, according to the CME FedWatch tool.
Mark Chandler, chief market strategist at Bannockburn Forex, said: “The market recognizes that the tightening cycle is over. However, the market has priced in aggressive easing by most G10 central banks and has swung sharply. ” he said.
Chandler said the coming weeks are likely to continue the trend correction that started last month.
Friday’s data showed U.S. prices rose modestly in December, keeping the annual rise in inflation below 3% for the third month in a row and suggesting interest rate cuts are likely before the end of the year. My expectations grew stronger.
Investor attention this week will be squarely on the two-day Federal Reserve policy meeting starting Tuesday, with the central bank widely expected to hold interest rates steady, with all eyes on Fed Chairman Jerome Powell and his I’ll focus on the comments.
“This Wednesday’s meeting should be straightforward…There is little reason for the FOMC to make any meaningful changes to its statement,” said Paul McKell, global head of currency research at HSBC.
“The focus will be on potential changes to the Fed’s balance sheet and Chairman Powell’s thoughts on whether and when the pace of QT (quantitative tightening) should slow.” .
Beyond the Fed, investors will also be looking at a number of economic indicators, including the U.S. jobs report, which helps gauge the strength of the labor market.
The euro was last up 0.05% at $1.0847, while the pound sterling was last up 0.04% at $1.2703, ahead of a Bank of England meeting later this week.
On Monday, the Japanese yen rose 0.01% to 148.14 yen to the dollar. Asian currencies have fallen nearly 5% against the dollar in January, which is expected to be the weakest monthly performance since June 2022.
Meanwhile, investors are wary of rising geopolitical risks after three U.S. service members were killed in a drone attack on U.S. troops in northeastern Jordan near the Syrian border.
US President Joe Biden blamed Iranian-backed groups for the attack, which was the first deadly attack on US troops since the Israeli-Hamas war broke out in October.
Analysts said geopolitical turmoil could temporarily boost the safe-haven yen.
Elsewhere, the Australian dollar rose 0.21% to $0.659, and the New Zealand dollar rose 0.18% to $0.610.
Among cryptocurrencies, Bitcoin was last up 0.18% to $42,062.00.
