The dollar pared some gains overnight, slipping from an 11-year trade-weighted high as investors, who have bid the dollar sharply higher over recent weeks, took a breather ahead of a busy week of central bank activity and economic data. The greenback slipped as investors looked to flatten their books a bit ahead of the Fed’s two-day FOMC meeting, which concludes on Wednesday. Key for the dollar’s continued strength will be the extent to which the Fed sticks to its previous statement, which focused on the improving domestic backdrop and largely looked past macroeconomic headwinds and uncertainty. A Fed statement that continues to characterize downward pressure on inflation as transitory and minimize the impact of a stronger dollar on the recovery will likely keep the outlook for a mid-2016 rate hike on track and likely keep the greenback broadly supported.
The euro tumbled to a new 11-year low against the greenback after the leftist Syriza party swept to power in Greece’s weekend election. The party’s resounding victory, while short of an outright majority, seriously raises the risks of a debt showdown between Athens and the EU/IMF over the nation’s bailout terms, which Syriza’s 40-year old leader and Greece’s new Prime Minister Alexis Tsipras labeled as “catastrophic austerity” and causing Greece “humiliation and suffering”. While the euro has rebounded from its lows, tough comments from Greece’s new leadership regarding the terms of its EU/IMF loans could see the euro push lower.
The British pound found some support overnight after a BOE Monetary Policy Committee member said that if U.K. inflation rises, rates may have to increase sooner than investors are currently pricing in. The pound’s direction remains heavily driven by fluctuating expectations for the timing of a BOE lending rate hike.
The Aussie recovered from a new five and a half-year low and the kiwi bounced off of a three-year trough overnight.
USD: The dollar slipped from an 11-year high against a basket of its major rivals overnight as investors flattened their books ahead of this Wednesday’s FOMC monetary policy statement. Investors are keen to see if the Fed is becoming any more concerned about macroeconomic headwinds and if the outlook for a mid-2016 interest rate hike remains on-track. The most recent Fed statement was notable not only because it modified its “considerable period” language, but also because it continued to characterize the oil-driven decline in inflation as “transitory” and continued to downplay the negative impact of a stronger dollar on the U.S. recovery. The fact that the Fed still saw the U.S. economic recovery as being able to withstand the global economic headwinds plays into the notion of the divergent growth and monetary policy outlook that has been at the heart of the dollar’s massive rally. Any signs that the Fed is becoming more cautious about 1) a stronger dollar 2) plummeting oil prices 3) persistent below-trend inflation 4) a global economic slowdown 5) increasing global market volatility could suggest a mid-year rate hike may be at risk and would likely send the dollar lower.
EUR: The euro slid to a new 11-year low against the dollar after the leftist and anti-euro Syriza party enjoyed a resounding victory in Greece’s weekend election. The party won 149 seats in the 300- seat parliament, just short of the 151 needed for an outright majority, but still enough to partner with another fringe anti-establishment party to form a majority coalition. The result sets the stage for a potentially dangerous showdown between Athens and the EU/IMF over the terms of the nation’s five-year old bailout. Syriza’s 40-year old leader and new Greek Prime Minister said in his victory speech that the nation “leaves behind catastrophic austerity, fear and authoritarianism”. The possibility of Greece refusing to honor the terms of the previous government could result in a period of heightened market volatility, possibly a default on its debts and maybe even an exit from the euro zone. The Greek election has come to be seen as a referendum on austerity and could embolden other anti-establishment movements in Italy, Spain and Portugal. Traders will be watching for any market-moving comments from Greece’s new leadership.
GBP: Sterling bounced against the dollar overnight after a BOE Monetary Policy Committee member said a rebound in inflation could cause the BOE to raise rates sooner than markets are currently pricing in. The comments come amid expectations that the BOE will not raise rates until 2016 following the latest CPI report, which showed consumer prices in the U.K. fell to a decade low in December.
NZD: The New Zealand dollar rebounded off of a three-year low against the greenback ahead of this week’s RBNZ meeting where the bank is likely to abandon its policy tightening bias.