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US dollar slumps as new Covid variant weakens prospect of early Fed rate hike

currency-newsUS dollar slumps as new Covid variant weakens prospect of early Fed rate hike
The US dollar was placed on the defensive on Friday due to doubts whether the Federal Reserve will be willing to hike interest rates amidst worries over a new Covid variant of concern.

Meanwhile, the pound is mixed so far this morning, with GBP/EUR strengthening to €1.1828 and GBP/USD muted at $1.3331. GBP/CAD has weakened to C$1.6999, while GBP/AUD and GBP/NZD are lower at AU$1.8673 and NZ$1.9541, respectively.

Looking ahead, the focus today may be on Germany’s consumer price index. Will another sharp rise in inflation buoy the euro?

What’s been happening?

The US dollar fell in tandem with US Treasury yields at the end of last week’s session as investors began to reassess their expectations for the next Fed rate hike.

With reports suggesting that current vaccines may be ineffective against a new variant of Covid first detected in South Africa, USD investors began to doubt that the Fed will be willing to accelerate its current tightening cycle.

The pound faced similar pressure on Friday as the new Covid variant also dented the odds that the Bank of England (BoE) might hike interest rates in December.

Meanwhile, the euro, trended higher at the end of last week’s session as the adjustment of Fed and BoE rate expectations also limited the pricing in of policy divergence between the European Central Bank (ECB) and its peers.

What’s coming up?

Looking ahead to the start of this week’s session, the publication of Germany’s latest CPI reading is likely to be in the spotlight.

November’s preliminary figures are expected to report inflation in the Eurozone’s largest economy accelerated to 5%, but the question EUR investors will be asking is whether this will be enough to persuade the ECB to consider altering its dovish bias?

For USD investors the focus will be on a speech by Federal Reserve Chair Jerome Powell. Traders will be looking out for any comments about whether the new Covid strain will impact the Fed’s policy outlook, with the US dollar potentially weakening if Powell strikes a cautious tone.

Finally, in the absence of any notable GBP data release, the pound could struggle to find direction today.
Philip McHugh

Philip McHugh

Joining the corporate trading desk in 2007, Phil now over sees all of Currencies Direct’s corporate dealing activity. Having gained experience working with hundreds of businesses to optimise international payments processes and execute comprehensive risk management strategies, Phil currently works with a portfolio of corporate clients whilst managing Currencies Direct’s overall market exposure

Phil has FCA approval and has completed the Certificate in International Treasury Management (CertiTM)

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