EUR/USD at 7-week lows as March rate cut bets unwind

Dollar holds at 7-week highs against euro as Fed Chair Powell dismisses March interest rate cut

The U.S. dollar maintained its position near a seven-week peak against the euro on Thursday, which it reached after remarks from Federal Reserve Chair Jerome Powell, who dismissed the prospect of a U.S. interest rate cut in March.

The dollar to yen rate, on the other hand, preserved its gains from the previous night in the wake of falling Treasury yields, driven by concerns surrounding regional U.S. bank New York Community Bancorp, which triggered a flight to safer investments. The USD to JPY held around 146.70, with the Japanese yen gaining 0.17% against the greenback.

The British pound remained relatively stable as the market awaited the Bank of England's (BoE) policy announcement later in the day, looking for clues on the timing of a potential UK interest rate cut. The Bank of England is widely expected to keep interest rates unchanged, as per market commentary.

As of 09:30 AM on Thursday, the U.S. dollar index (DXY) — a measure of the greenback’s strength against a basket of major peers including the pound, euro, and yen — gained 0.44% to 103.73,after rising 0.19% on Wednesday.

The dollar index is hovering near its recent peak of 103.82, reached both this Monday and last Tuesday, and previously not seen since December 13.

Recent U.S. economic indicators — such as the better-than-expected Q4 GDP reading — have supported the dollar by suggesting the Federal Reserve might delay interest rate cuts.

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Powell pushes back, says March interest rate cuts “not base case”

Powell gave U.S. dollar another push overnight by calling a cut in March "not the base case."

At a news conference after the Fed left rates unchanged, but dropped a longstanding reference to possible further hikes, Powell said:

"I don't think it's likely the committee will reach a level of confidence [to ease policy] by the time of the March meeting — but that's to be seen”.

Market odds now indicate a 38% chance of a Fed rate cut in March, a decrease from 59% before the Fed's latest decision, and down from 89% one month ago.

Nonetheless, traders still anticipate nearly 150 basis points in rate cuts throughout the year.

James Kniveton, senior corporate forex dealer at Convera, responded to the news in a comment to Reuters:

"The Fed's silence on the timing of their first cuts keeps markets on edge (and) the dollar likely benefits from this delay. However, the market's anticipation of potential cuts later in the year could eventually chip away at the dollar's resilience. I would say there's some fear in the market that the Fed are going to take too long to bring down rates, and that will mean they need to move to a lower terminal rate than initially thought”.

In emailed comments to MarketWatch, Matthew Ryan, head of market strategy at global financial services firm Ebury, said:

“This delayed start to cuts seems appropriate to us, particularly given the strength of recent data on both the US economy and the labour market”.

EUR/USD weakest since mid-December, British pound slips, Japanese yen gains

The euro was down 0.18% at $1.08, inching closer to its Wednesday low of $1.0795 — the weakest since Dec. 13.

Pound sterling slipped further by 0.28% to $1.2653. While the Bank of England is expected to keep rates unchanged, the market has fully priced in a rate cut by June.

Against the Japanese yen, the dollar fell slightly by 0.11% to 146.79, extending its 0.47% loss from Wednesday.

The dollar to yen pair often reflects the movement of U.S. long-term yields, with the 10-year Treasury yield at approximately 3.94% on Thursday, down from 4.057% on Tuesday, despite Powell's less dovish stance.

Ray Attrill, head of FX strategy at National Australia Bank, told Reuters:

"For 10-year yields, whether the Fed's going in March or whether it's going in May is much less relevant. May is looking like a pretty good bet given the amount of inflation news the Fed will have between now and then (and) the price action suggests that's the market's view as well."

U.S. yields, which inversely correlate with bond prices, had already declined before the Fed's decision, as New York Community Bancorp's stock plummeted following an unexpected loss and dividend cut, leading investors to flock to U.S. Treasury bonds amid growing concerns over the stability of other regional banks.

Reuters quoted Sean Callow, a foreign-exchange strategist at Westpac, as saying:

"It was certainly striking that the biggest move in UST yields was hours before the FOMC rather than after". However, "if markets regard the knee-jerk response to the regional bank news as an over-reaction, then the less dovish FOMC will be the key story in coming days, supporting the U.S. dollar," he added.

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