Dollar steady in cautious start to busy data, Fed week

SINGAPORE, Jan 29 – The dollar started the week on a steady footing as investors took stock of US economic data ahead of the Federal Reserve policy meeting this week, while escalating geopolitical tensions in the Middle East kept risk sentiment in check.

The dollar index, which measures the US currency against six rivals, inched 0.01% higher to 103.55 on Monday, set for a 2% gain in January as traders temper expectations of early and deep US interest rate cuts.

The Fed in December surprised markets by taking a dovish tone and projecting 75 basis points of rate cuts in 2024, 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 currently pricing in a 48% chance of a rate cut in March, the CME FedWatch tool showed, compared with an 86% chance at the end of December.

“The markets recognize that the tightening cycle is over. However, 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 began last month, Chandler said.

Data on Friday showed US prices rose moderately in December, keeping the annual increase in inflation below 3% for a third straight month and reinforcing expectations that rate cuts are likely to come this year.

Investor attention this week will squarely be on the Federal Reserve’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 FOMC 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 Fed’s balance sheet and whether the pace of QT (quantitative tightening) should slow, and if so when?”

Beyond the Fed, investors will also watch for a slew of economic data including a US payrolls report that will help gauge the strength of labor market.

The euro was down 0.05% at USD 1.0847, while Sterling was last at USD 1.2703, up 0.04% on the day ahead of Bank of England meeting later this week.

The Japanese yen strengthened 0.01% to 148.14 per dollar on Monday. The Asian currency is down nearly 5% against the dollar in January, on course for its weakest monthly performance since June 2022.

Meanwhile, investors are wary of heightened geopolitical risks after three US service members were killed in an aerial drone attack on US forces in northeastern Jordan near the Syrian border.

US President Joe Biden blamed Iran-backed groups for the attack, the first deadly strike against US forces since the Israel-Hamas war erupted in October.

The geopolitical ructions could provide the safe haven yen a temporary lift, analysts said.

Elsewhere, The Australian dollar rose 0.21% to USD 0.659, while the New Zealand dollar gained 0.18% to USD 0.610.

In cryptocurrencies, bitcoin last rose 0.18% to USD 42,062.00.

(Reporting by Ankur Banerjee in Singapore. Editing by Sam Holmes)