Dollar steadies before Fed testimony, pound jumps

[February 26, 2019]   By Saikat Chatterjee

LONDON (Reuters) - The dollar held near a one-week low on Tuesday and marked time before a key testimony by U.S. Federal Reserve Chairman Jerome Powell later in the day in which he might give a further boost to risk appetite.

United States one dollar bills on a light table at the Bureau of Engraving and Printing in Washington Nov. 14, 2014. REUTERS Gary Cameron

Investors will be firmly focused on his views on U.S. interest rates as investors have trimmed bets of any more rate hikes this year with some even betting for cuts by 2020.

But with tensions over U.S.-China trade disputes, a key headwind for the global economy, showing signs of ebbing this week, some market participants believe markets may be getting ahead of themselves.

"I think it is too early to call an end to the U.S. rate hike cycle and if the trade tensions dissipate, it will give a big boost to the U.S. economy which is already performing well," said Kenneth Broux, a currency strategist at Societe Generale in London.

Money markets have ruled out any more rate hikes for the remainder of the year with an 80 percent probability of a rate cut by January, 2020.

Powell will testify before the Senate Banking Committee on the first day of a two-day appearance before lawmakers. Market watchers expect him to underline the Fed's sensitivity to asset prices and deliver an upbeat assessment of domestic growth prospects.

Against a basket of other currencies, the dollar was broadly steady at 96.43 after hitting its lowest level in a week at 96.31 in Asian trading.

Risky assets had a strong start to the week with the Chinese currency hitting a seven-month high on Monday after U.S. President Donald Trump confirmed he would delay a planned hike in tariffs on Chinese imports.

"Powell's comments should bolster an already improving market for risk appetite and we remain constructive on risk," said Manuel Oliveri, a currency strategist at Credit Agricole in London.

Powell and other Fed policymakers have indicated they favor patience before raising key lending rates again due to recent signs of slowing economic growth. The futures market implies traders are betting the central bank will not raise interest rates at all in 2019.

Improving risk appetite was more evident in the British pound after media reports that Prime Minister Theresa May was considering delaying the March 29 deadline for the UK's exit from the European Union.

The pound was last up nearly a percent on the day at $1.3211 and it gained by a similar amount against the euro to 86.01 pence.

The Sun newspaper also reported May will propose formally ruling out a "no-deal" Brexit scenario which could potentially lead to a delay in the UK's exit from the EU by months.

The euro was broadly flat at $1.13650 after advancing 0.2 percent on Monday.

(Reporting by Saikat Chatterjee; Additional reporting by Daniel Leussink in Tokyo; Editing by Kirsten Donovan and Ed Osmond)

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