The dollar index rose 0.01% to 103.55 on Monday, set for a 2% gain in January as traders temper expectations of early and deep U.S. interest rate cuts
The dollar started the week on a steady footing as investors took stock of U.S. economic data ahead of the Fed policy meeting this week, while growing geopolitical tensions in the Middle East kept risk sentiment in check.
The dollar index rose 0.01% to 103.55 on Monday, set for a 2% gain in January as traders temper expectations of early and deep U.S. interest rate cuts.
The Fed in December surprised markets by taking a dovish tone and projecting 75 bps of rate cuts this year, resulting in markets pricing in early and steep easing, with a cut expected as early as March.
But since then, strong economic data and pushback from central bankers have prompted traders to adjust expectations. Markets are presently pricing in a 48% probability of a rate cut in March, according to the CME FedWatch tool, compared with an 86% probability at the end of December.
The markets recognise that tightening cycle is over. Nevertheless, they swung hard, pricing in aggressive easing by most of the G10 central banks, said Marc Chandler, chief market strategist, at Bannockburn Forex.
The coming weeks will likely continue the correction of the trends that started last month, Chandler added.
Data on Friday showed U.S. prices increased moderately in December, keeping the annual rise in inflation below 3% for a third successive month and reinforcing expectations that rate cuts are likely to come this year.
Investor attention this week will squarely be on the Fed’s two-day policy meeting which starts on Tuesday, with the central bank widely expected to stand pat on rates, leaving the spotlight all on Fed Chair Jerome Powell and his comments.
This Wednesday’s meeting should be straightforward. There is little reason for the Federal Open Market Committee to make meaningful changes in the statement, said Paul Mackel, global head of FX research at HSBC.
The focus will be on Chair Powell’s thinking about potential changes to the Federal Reserve’s balance sheet and whether the pace of QT (quantitative tightening) should slow, and if so when?, he added.
The euro was 0.05% lower at $1.0847, while Sterling was at $1.2703, up 0.04% on the day ahead of BoE meeting later this week.
The Japanese yen firmed 0.01% to 148.14 per dollar on Monday. The Asian currency is down around 5% against the dollar in January, on course for its weakest monthly performance since June 2022.
Elsewhere, The Australian dollar gained 0.21% to $0.659, while the New Zealand dollar added 0.18% to$0.610.
