Dollar Weakens Ahead of Stimulus Talks, Federal Reserve; Pounds Jumps

© Reuters.
© Reuters.

By Peter Nurse

Investing.com – The dollar headed lower in early European trade Monday, as traders deserted the safe haven on hopes that Congress will finally agree a fiscal stimulus package ahead of the Federal Reserve’s policy meeting. 

At 3:50 AM ET (0750 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was down 0.4% at 90.562, trading near a two-and-a-half year low.

fell 0.1% to 103.98, rose 0.4% to 1.2155, while the risk-sensitive was up 0.4% at 0.7564, ahead of the release of the Reserve Bank of Australia‘s minutes from its latest policy meeting, due on Tuesday.

The dollar has been under pressure on hopes for a global economic recovery from Covid-19 grew over positive vaccine news and hopes for the latest U.S. stimulus measures increasing investors’ risk appetite.

A bipartisan bill for a $908 billion Covid-19 relief package is set to be introduced in Congress later in the day, which could be split into two separate packages in order to maximize the chances of something getting throughhough differences between Republicans and Democrats. 

Additionally, the U.S. Food and Drug Administration recommended approval on Friday of Pfizer ‘s  (NYSE:) Covid-19 vaccine for emergency use, paving the way for vaccinations to get underway in America this week.

Also on the agenda this week is the last Federal Reserve meeting of the year, with the central bank expected to keep interest rates low for an extended period.

“Our team expect a dovish message to be maintained as well as perhaps some forward guidance on the Fed’s asset purchases. The Fed is an experienced communicator and we doubt it will make any mistakes over misconstrued words on premature removal of stimulus,” said ING analysts, in a research note.

Elsewhere, rose 1.2% to 1.3386, soaring after Britain and the European Union extended talks past Sunday’s self-imposed deadline in order to try and strike a Brexit trade deal.

If a trade agreement isn’t struck by the end of the year, free movement of goods, services, people and capital between the two zones will come to an abrupt end. However, the extension of the negotiating time frame suggests increased political interest in avoiding that outcome.

“We see an asymmetric GBP reaction function to the UK-EU trade negotiation outcome, with modest upside in the case of a deal but profound downside in the event of no deal as fairly limited risk premium is currently priced into GBP,” ING added.

ING sees a deal as more likely than not, adding this should push GBP/USD above the 1.35 level, towards 1.37.

The Bank of England also holds a policy meeting later this week, but the central bank is not expected to move while the Brexit negotiations continue. It has already extended its QE program.by 150 billion pounds in November.

 

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