Dollar Dips on Rate View, Pound Rises ahead of Brexit Vote

The U.S. dollar dipped against a currency basket on Tuesday amid expectations the Federal Reserve will hold off on raising rates this year due to weakness in global growth, while the pound crept higher before Britain’s parliamentary vote on its Brexit deal.

Fears of a sharp global slowdown this year have risen in recent weeks, as the effect of last year’s U.S. tax cuts is set to fade and the trade war with China is set to escalate. That may at least slow the pace at which the Fed tightens monetary policy, or even stop it altogether.

Interest rate futures markets are pricing in no further U.S. rate hikes in 2019.

The futures contract on the U.S. dollar index, which measures the greenback’s strength against a basket of six major currencies, was at 95.21 by 03:06 AM ET (08:06 AM GMT) after edging down to 95.06 overnight. It had hit a three-month low of 94.79 last week.

“There is a strong dislike for the dollar given Fed expectations, but at the same time there is not a compelling replacement,” said Sim Moh Siong, currency strategist at Bank of Singapore. “Over the next 6-12 months, the dollar should trend lower.”

Fed Chairman Jerome Powell said last week the U.S. central bank has the ability to be patient on monetary policy given that inflation remains stable.

The pound briefly rose back above the 1.29 level ahead of a vote on the government’s Brexit deal with the EU in the British parliament.

GBP/USD was up 0.17% to 1.2881 after rising as high as 1.2916 earlier, while EUR/GBPslipped 0.13% to 0.8902.

British Prime Minister Theresa May must win a vote in parliament later on Tuesday to get her Brexit deal approved or risk a chaotic exit for Britain from the European Union. The numbers are not in May’s favor and her chances of winning the vote look extremely slim. May needs to secure 318 votes to win.

“Interestingly, speculators have been betting that this outcome could lead to a possible delay to Brexit from 29 March to July (after the EU Parliament elections in May) to allow for fresh elections or a second referendum,” Philip Wee, currency strategist at DBS, said in a note.

But other analysts expect the pound will take a major beating if May loses the vote by a wide margin.

“Losing by 100 or more votes is a major defeat but there’s some talk that she could lose by 200 votes. A major loss will lead to a knee jerk decline in GBP that could take GBP/USD below 1.25 and EUR/GBP above 91 cents,” said Kathy Lien, managing director of currency strategy at BK Asset Management in a note.

The euro was holding steady against the U.S. currency, with EUR/USD changing hands at 1.1469.

Elsewhere, the Australian and New Zealand dollars, both considered proxies for global risk appetite, strengthened, having recovered from Monday’s lows.

Sentiment was aided by a fresh round of commitments from Chinese policymakers to stimulate their economy though fiscal and monetary steps.

AUD/USD was up 0.31% to 0.7261, while NZD/USD added on 0.32% to trade at 0.6840.

The Aussie dollar has stabilized above the $0.72 level and most analysts think it points to Chinese growth likely bottoming out in the next few quarters. Given the sharp slowdown in economic activity and the negative impact of the U.S.-Sino trade dispute on the Chinese economy, analysts are hopeful that leaders of the two countries will reach a comprehensive trade deal in the coming weeks.

Trade tensions between the world’s two largest economies had rattled financial markets for most of last year./investing.com

 

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