Dollar's Setback Likely Temporary

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The Dollar's pullback has extended, but it should strengthen again in March, warn analysts.

The Dollar weakened has extended despite the Federal Reserve confirming overnight its caution around lowering interest rates too quickly, suggesting the 'hawkish' repricing has largely run its course.

The Pound to Dollar exchange rate cemented gains above 1.26 after the minutes of the Fed's February 01 policy meeting confirmed to investors a March rate cut was off the table, and money markets showed the chance of a 25bp cut by the June FOMC meeting at 90%, down from 100% just a day ago.

"The US dollar generally has been lagging the climb in U.S. interest rates since early last week. The FOMC minutes overnight confirmed that a Fed rate cut is unlikely to occur soon," says Alvin T. Tan, a strategist at Royal Bank of Canada.

That the Dollar was unable to advance following the release of the Fed's minutes suggests the hawkish repricing that has dominated FX markets and underpinned USD strength in 2024 is likely coming to a pause.

Pound Sterling Live's Week Ahead forecasts looked for the Pound to firm against the Dollar this week, judging that the Dollar's 2024 rally was looking 'long in the tooth' and ready to fade. This expectation has played out as expected, underpinned by the view that the market now accepts there will be far less by way of Fed rate hikes in 2024 than initially thought.

"GBP/USD is likely to trade in a range, likely between 1.2600 and 1.2660," says Quek Ser Leang, Markets Strategist at United Overseas Bank in Singapore. "Upward momentum has increased slightly; GBP is likely to edge higher towards the major resistance at 1.2690."

Above: Pound-Dollar at 4-hour intervals. Track GBP/USD with your own custom rate alerts. Set Up Here

"USD slipped overnight but moves remain subdued. As expected, the release of FOMC minutes did not matter as much to FX this time as hawkish repricing post-inflation reports have already taken place. There was also little new information," says Frances Cheung, Rates Strategist at OCBC Bank.

Richard Franulovich, a foreign exchange strategist at Westpac Bank, says major currencies are enjoying a reprieve, with the U.S. Dollar Index on track to snap a 5-week winning streak.

However, he warns that "USD strength seems likely to return next month into the FOMC meeting."

"DXY still has a soft undercurrent to it, even as the FOMC minutes downplayed rate cuts. But the bulk of DXY’s 3.5% gains this year have unfolded over just a handful of marquee data and event sessions anyway," explains Franulovich.

An example would be the outsized rally in the Dollar that followed the release of January's inflation figures that showed a broad firming of prices that warned the fall to the 2.0% inflation target was not a foregone conclusion.

But, outside these big data and event-driven moves, Franulovich notes the Dollar has been "decidedly consolidative, giving the appearance of a staircase uptrend".

"That suggests DXY should retain the bulk of 2024’s gains, with key event risks in coming weeks potentially fuelling another DXY leg up," he explains.