US dollar skyrockets as Fed rate cut bets plummet

Philip McHugh February 6th 2024 - 2 minute read

The US dollar stormed higher on Monday as USD investors continued to reprice Federal Reserve interest rate cut expectations.

Meanwhile, trade in the pound is mixed this morning, with GBP/EUR stable at €1.1674 and GBP/USD buoyed at $1.2555. GBP/CAD is muted at CA$1.6966, while GBP/AUD slides to AU$1.9287 and GBP/NZD is subdued at NZ$2.0680.

Looking ahead, will Germany’s stronger-than-expected factory orders figures help to underpin the euro today?

What’s been happening?

The US dollar got off to a flying start this week after expectations for a March interest rate cut from the Federal Reserve collapsed.

USD exchange rates surged on the back of comments made by Fed Chair Jerome Powell on 60 Minutes over the weekend, in which he warned against cutting rates too soon.

The odds of a cut next month have now plummeted to just 15%, down from roughly 50% at the start of last week.

Reinforcing the upside in the ‘greenback’ was an upbeat ISM services PMI.

Expectations that US interest rates will remain higher for longer weighed on market sentiment on Monday, which led the increasingly risk-sensitive pound to give ground against most of its peers, despite a stronger-than-expected services PMI.

At the same time, the euro was muted yesterday, as it was pressured by both its negative correlation with the US dollar, in addition to some weaker-than-expected trade data from Germany.

What’s coming up?

Today’s session opened with the publication of Germany’s latest factory orders data.

December’s figures smashed expectations, with order growth rising by 8.9% versus forecasts it would stagnate. The upbeat data may help to ease fears that Germany is the ‘sick man’ of Europe.

A speech by Fed policymaker Loretta J Mester could extend the US dollar’s bullish run today. As one of the US central bank’s more hawkish members, her comments may further undermine Fed rate cut bets.

Finally, in the absence of any notable UK data, movement in the pound may remain tied to market risk dynamics, potentially leading to losses if the mood remains cautious.

Written by
Philip McHugh

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