The U.S. dollar rose to a two-week high on Monday after strong economic data last week led investors to re-assess whether the Federal Reserve will sound as dovish as expected at this week’s monetary policy meeting.
Broader currency markets were quiet, as traders hesitated to put on large positions before the Fed meeting, a meeting of European Central Bank (ECB) policymakers in Portugal and the Bank of England’s interest rate decision on Thursday.
Strong U.S. retail sales on Friday reduced the chances of a rate cut this week, and lifted the dollar although Fed Chairman Jerome Powell is expected to leave open the possibility of future rate cuts.
Expectations of a rate cut at the Fed’s June 18 and June 19 meeting fell from 28.3 per cent on Thursday to 21.7 per cent after the retail data, according to CME Group’s FedWatch tool.
However, bets for monetary easing at the July meeting remain at 85 per cent.
“Despite what should be a softer dollar environment this summer, there are enough EUR negatives out there (ECB easing, trade wars, Italy & Brexit to name a few) to prevent EUR/USD breaking out of a 1.10 dollar and 1.15 dollar range this year,” ING analysts said in a note.
The dollar index, which measures it against a basket of currencies, stood unchanged at 97.569, near a two-week high reached earlier in the session. The euro was little changed at 1.1209 dollar.
Fears that a protracted Sino-U.S. standoff could tip the global economy into recession have prompted rate cuts in India, Philippines, Malaysia, New Zealand and Australia.
The ECB also has raised the prospect of more stimulus, and the Bank of Japan is widely expected to reinforce its commitment to maintain its stimulus for a while yet.
Although markets are pricing in a Fed rate cut in July, analysts say much will depend on U.S.-China talks to resolve a conflict over trade.
“Markets are pricing a high probability of a July cut, in spite of there being unusually high uncertainty, particularly around trade,” RBC strategist, Elsa Lignos said.
The dollar was flat at 108.60 yen after edging up 0.15 per cent on Friday.
Sterling slid further toward a 2019 low, touching 1.2575 dollar, its weakest since January. Investors worry Boris Johnson, the front runner to replace Prime Minister Theresa May, could put Britain on a path toward a no-deal Brexit.
