Dollar declines as Fed is close to cutting rates

KBC Market Research Desk KBC Bank

The dollar traded with a tentative negative bias ahead of the Fed decision. The Fed left rates unchanged but is closely monitoring whether uncertainties that are weighing on the economy will call fur policy accommodation in the near term. The dots indicate that the case for rate cuts later this year is building within the FOMC. Even a 50 bp rate cut in a not that distant future is possible. US yields and the dollar declined further. On the dollar, Fed's Powell repeated that the Treasury is responsible for FX. The Fed doesn't target the dollar. EUR/USD closed at 1.1226, well off the intraday peak. USD/JPY finished at 108.10.

The Fed-inspired risk rally continues in Asia this morning. China outperforms. Japan underperforms. The BOJ left its policy unchanged, but the Bank is coming under growing pressure to join the easing stance of the ECB and the Fed. USD/JPY dropped further (currently near 107.65). A further slide in US yields is supporting EUR/USD (1.1265 area).

The yuan also strengthens against an overall weaker dollar (USD/CNY 6.8675). RBA's Lowe said that it wasn't unrealistic to expect a further rate cut and called for fiscal stimulus, too. The gain of the Aussie dollar against the USD is modest. (AUD/USD 0.6890).

Today, there are few data in Europe. In the US, the jobless claims and the Philly Fed business outlook are not the most high profile data series, but any signs of weakness might weigh on the dollar.

Earlier this week, euro weakness prevailed as Draghi signalled further ECB easing. The Fed at least restored the balance of softness, as it showed to be close to cutting rates soon if necessary. Any Fed action is still data-depended. Even so, we see an asymmetrical reaction function for the dollar, with the US currency being more sensitive to negative rather than to positive news. EUR/USD support at 1.1180/1.1107 looks solid. EUR/USD probably entered a buy-on-dips pattern for return action higher in the 1.1180/1.1350 trading range.

EUR/GBP lost gradually further ground yesterday and closed below the 0.89 handle. Boris Johnson becoming the next UK PM looks more or less discounted. Today, the UK calendar is well filled with the retail sales and the BoE policy decision. Markets will closely monitor whether the BoE keeps its guidance for gradual rate hikes. The market already for quite some time sees this call as unlikely, but the BoE might wait till the August inflation report the chance its assessment. Even so, The BoE shifting to a more neutral bias might be a (modest negative) for sterling.

Download The Full Sunrise Market Commentary Currencies

Author

KBC Market Research Desk

KBC Bank

EUR/USD hits two-day highs near 1.1820

EUR/USD picks up pace and reaches two-day tops around 1.1820 at the end of the week. The pair’s move higher comes on the back of renewed weakness in the US Dollar amid growing talk that the Fed could deliver an interest rate cut as early as March. On the docket, the flash US Consumer Sentiment improves to 57.3 in February.

GBP/USD reclaims 1.3600 and above

GBP/USD reverses two straight days of losses, surpassing the key 1.3600 yardstick on Friday. Cable’s rebound comes as the Greenback slips away from two-week highs in response to some profit-taking mood and speculation of Fed rate cuts. In addition, hawkish comments from the BoE’s Pill are also collaborating with the quid’s improvement.

Gold climbs further, focus is back to 45,000

Gold regains upside traction and surpasses the $4,900 mark per troy ounce at the end of the week, shifting its attention to the critical $5,000 region. The move reflects a shift in risk sentiment, driving flows back towards traditional safe haven assets and supporting the yellow metal.

Crypto Today: Bitcoin, Ethereum, XRP rebound amid risk-off, $2.6 billion liquidation wave

Bitcoin edges up above $65,000 at the time of writing on Friday, as dust from the recent macro-triggered sell-off settles. The leading altcoin, Ethereum, hovers above $1,900, but resistance at $2,000 caps the upside. Meanwhile, Ripple has recorded the largest intraday jump among the three assets, up over 10% to $1.35.

Three scenarios for Japanese Yen ahead of snap election

The latest polls point to a dominant win for the ruling bloc at the upcoming Japanese snap election. The larger Sanae Takaichi’s mandate, the more investors fear faster implementation of tax cuts and spending plans.

XRP rally extends as modest ETF inflows support recovery

Ripple is accelerating its recovery, trading above $1.36 at the time of writing on Friday, as investors adjust their positions following a turbulent week in the broader crypto market. The remittance token is up over 21% from its intraday low of $1.12.