The Dollar’s strength over the past couple of days may not be justified by the Fed’s actions. However, when analysing a currency’s exchange rate, it should be relative to a peer. So far it seems none of these peers have a competitive advantage, making the Dollar the less unloved currency. Almost all central banks are admitting difficult times lie ahead. The latest was the Reserve Bank of Australia which surprised the markets yesterday when its Governor Philip Lowe opened the door for a rate cut. His comments crushed the Australian Dollar, sending it 1.8% lower against the USD, in its worst performance day since June 2016. Global risks were among the major factors that led to the shift in policy guidance.
Sterling remained closer to the two-week low as investors continue to worry about the probability of a no-deal Brexit. This week, the European Union has warned about the increasing chances of having a no deal arrangement. Today, investors will focus on the Bank of England (BOE), which will release the interest rates decision. The bank is expected to leave interest rates unchanged at 0.75%. Traders will keep a close eye on the bank’s view of Brexit and outlook for the year.
In Germany, yesterday’s factory order data pointed to tentative signs that the car sector recovery started to pick up speed at the end of 2018. It will be interesting to see whether today’s December industrial production data shows a similar trend and whether the big drop in pharma production in November has reversed. Later in the morning, the European Commission will also release its new economic forecasts. Markets will particularly pay attention to the extent of cuts to the euro area growth prospects.