27/01 – Federal Reserve meeting due as dollar weakens

Jeremy Thomson-Cook
Jeremy Thomson-Cook 27 January 2021

GBP: Data remains a risk to sterling upside

EUR: ECB studies are a pre-cursor to intervention

USD: Dollar heading backwards into the Fed

Sterling

Sterling is enjoying some time out of the spotlight at the moment and has managed to pull higher once again despite the sobering news that the death toll due to Covid-19 in the UK is now more than 100,000 people.

As long as global risk appetite remains buoyant then sterling could easily continue its push higher but we continue to believe that risks from data showing the true economic effect of Brexit and Covid-19 remain and represent opportunities for the market to sell the pound.

Monday’s manufacturing PMI is the next major data point in our calendars.

Euro

Comments from the ECB are leading the market this morning with the central bank rumoured to have agreed to look into the euro’s appreciation against the US dollar since the start of the pandemic and whether the differences in the stimulus reactions of both the US and Eurozone have been the driving factor behind such a move.

Such a ‘study’ is a fairly overt way of telling the market that continual EUR strength against the USD may not be tolerated although the ECB’s ability to do something about it via rates or QE is a lot less now than during the darker days of the pandemic.

This is yet another factor that will we have to watch in speeches from ECB members in the coming weeks to see whether their line on a stronger euro has changed.

US dollar

Today is Federal Reserve day with a policy announcement at 7pm and a press conference at 7.30pm from Chair Powell. We remain of the opinion that now is far too early for a central bank to be considering a change in its policy landscape and that the overarching message from the Federal Reserve will be “inflation is nowhere close to target, and we are going to run it over target for a while, so the tap stays on.”

If we are correct this should limit USD strength although some of its recent solidity has come from fears that the vaccine is being rolled out to slowly, its possible lack of efficacy against mutated strains and stumbling blocks to stimulus in Congress, all of which the Federal Reserve has no hold over.

Elsewhere

Weaker inflation in Australia has given cause for some in the investment community to trim their positions on the AUD despite the IMF’s upgrade growth forecast for the country. If the Federal Reserve meeting goes as we expect we would be looking for the AUD to recover swiftly.

Have a great day.