Dollar Inches Up as Markets Brace for Powell's Words

29 Jan 2024 , 09:40 AM

The dollar initiated the week with stability as investors assessed U.S. economic data ahead of the Federal Reserve policy meeting. Geopolitical tensions in the Middle East influenced risk sentiment. The dollar index, measuring the U.S. currency against six counterparts, slightly increased by 0.01% to 103.55 on Monday, anticipating a 2% gain in January. Investors have moderated expectations for early and substantial U.S. interest rate cuts, influenced by strong economic data and central bankers’ pushback.

In December, the Fed surprised markets with a dovish tone, projecting 75 basis points of rate cuts in 2024. Initial expectations of aggressive easing have since diminished, with markets currently pricing in a 48% chance of a rate cut in March, according to the CME FedWatch tool.

Marc Chandler, Chief Market Strategist at Bannockburn Forex, noted a recognition in the markets that the tightening cycle is over, but a swing towards aggressive easing by most G10 central banks has occurred.

The upcoming Federal Reserve two-day policy meeting, starting on Tuesday, is expected to maintain interest rates, with focus on Fed Chair Jerome Powell’s comments, particularly regarding potential changes to the Fed’s balance sheet and the pace of quantitative tightening.

Investors will also monitor economic data, including a U.S. payrolls report, to gauge labor market strength. The euro was down 0.05% at $1.0847, while Sterling rose 0.04% to $1.2703 ahead of the Bank of England meeting later in the week. The Japanese yen strengthened 0.01% to 148.14 per dollar. Geopolitical risks increased after a drone attack on U.S. forces in Jordan, with President Joe Biden blaming Iran-backed groups. The yen, considered a safe haven, might experience a temporary lift.

In other currencies, the Australian dollar rose 0.21% to $0.659, and the New Zealand dollar gained 0.18% to $0.610. In cryptocurrencies, bitcoin rose 0.18% to $42,062.00.

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