US Dollar edges lower ahead of first FOMC meeting of 2018

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31 January 2018

Matthew Ryan

Senior Market Analyst at Ebury. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

The US Dollar edged lower against its major peers on Tuesday, with a pullback in US yields, reversing all of Monday’s gains. Investors are now awaiting today’s first FOMC meeting of 2018.

T
he greenback remains on course to post its worst monthly performance since July last year, with improving growth prospects globally and concerns over Donald Trump’s Presidency increasing bearish bets against the currency. Probably the most notable aspect of the US Dollar’s recent sharp depreciation is the degree to which FX traders have almost completely overlooked the widening in interest rate differentials between that of the US and almost every other major economy. US Dollar bulls will be hoping this trend changes this evening following the Federal Reserve’s first monetary policy meeting so far in 2018. This will mark Chair Janet Yellen’s last meeting before handing over the reins to Donald Trump’s chosen successor, Jerome Powell.

With interest rates expected to be held steady following December’s hike, investors will be looking for an indication as to the pace of additional tightening from the FOMC in 2018. The central bank could voice optimism over domestic demand in the US after the Q4 GDP report showed that private consumption was strong. The Fed will also voice that it is likely to need more information on the effects of Trump’s fiscal stimulus on both growth and inflation. We therefore expect the Fed to keep its view for three rate hikes this year unchanged, although we still think that four hikes in 2018 remain possible.

Carney eases Brexit fears, Eurozone grows by most in decade

In the UK, the Pound bounced back from its one week low as Governor of the Bank of England Mark Carney struck a more optimistic tone over the state of the Brexit negotiations, claiming that a disorderly Brexit looked less likely than before. He also spoke in an upbeat fashion about the UK economy, saying that the labour market had tightened and that a pickup in wages over the next few years appears to be ‘on track’. He also reiterated that inflation would remain above 2% in the near term, something that we think could encourage the BoE to hike rates again in 2018.

Meanwhile, the Euro spent much of the London session above the 1.24 mark against the US Dollar after data confirmed that the Eurozone economy grew at its fastest pace in a decade in 2017. The latest data showed that the currency bloc expanded by 2.5% year-on-year last year, comfortably above that of the UK. Arguably of more importance to the FX markets will be this morning’s inflation data for January, which is expected to show that headline price growth eased to just 1.3% this month.