The u.s. dollar has continued to show its strength on Wednesday, helped by comments from the head of the u.s. central bank, according to which the epidemic of the coronavirus lethal in China has hardly changed the trajectory expected of us interest rates.
At 10: 10, EUR/USD was trading at 1,0920, near the lowest in four months on Monday. GBP/USD was trading at 1,2975, an increase of 0.2%. The US Dollar Index, which tracks the greenback against a basket of six other currencies, stood at 98,612, an increase of 0.1%, approaching the levels observed in mid-October.
Yesterday, the chairman of the us federal Reserve system, Jerome Powell, said in remarks before the u.s. lawmakers that the central bank was monitoring closely the impact of the outbreak of the deadly coronavirus in China, “which could cause disruptions in China that impact on the rest of the global economy.”
However, Powell was not told that the disease had changed the outlook of reference of the central bank for the u.s. economy.
“The FOMC believes that the current stance of monetary policy will support the continued economic growth, a strong labour market and inflation returning to the target that is symmetrical to 2% of the committee,” said Powell. “As long as the incoming information on the economy will remain generally consistent with this outlook, the current stance of monetary policy will likely remain appropriate.”
Futures contracts on federal funds from January 2021 suggest at present that the market expects at least a rate cut of 25 basis points by the end of 2020, but employment growth has been much stronger than expected over the last two months and the surveys of confidence have tended to surprise to the upside.
Even if the federal Reserve conducts to a reduction of a quarter of a point this year – which is fully integrated by September – a base rate of 1.5% for the federal fund would still be considerably higher than what most other central banks in developed markets can offer.
The reverse side of the dollar’s strength is the weakness of the euro.
“EUR/USD continues to be weighed down by concerns about the coronavirus and its impact on the economy of the euro zone,” said analysts at ING (AS:INGA) in a research note. “At this point, a break below 1.0900 (also, a hollow multi-year) seems possible, especially as we expect to have a series of data losses in the euro area this week.”
The first point of data loss should be the number of December’s industrial output for the euro area, at 11: 00, which should have fallen 1.6% year-on-monthly in December, for an annual decline of 2.3%.
It should also be noted that the Swedish central bank has left its benchmark interest rate unchanged, as expected, after surprising the market by increasing in December by 25 basis points to 0%, thus putting an end to five years of rate negative.
“The minutes of the December meeting pointed out that the Riksbank may again reduce rates if needed,” said ING (AS:INGA), “although in reality we believe that the bar to decrease or to increase the rate soon is set relatively high”.
Thus, any movement would have an impact on the Swedish krona. At 10: 10 EUR/SEK was trading at 10,5076.