The US dollar was able to recover from earlier two-week lows on Wednesday as the spread of Covid-19 outside China quickened and expectations the Federal Reserve would signal further policy easing decreased. Tuesday’s risk-off mood was quickly squashed as the outbreak continued to spread rapidly through the Middle East and Europe. A report from the World Health Organization (WHO) revealed that there were more new infections outside of China than inside the country.
This also caused some investors to no longer see the American economy as immune from the effects of the virus, leading to predictions that the Fed would have to cut interest rates in order to support the economy.
However, Tuesday saw Fed Vice Chair Richard Clarida state that while the bank was monitoring the epidemic, it is still too soon to gauge whether or not monetary policy would need easing.
Meanwhile, a US official from the US Centers for Disease Control and Prevention (CDC) said that the country needed to prepare for the virus to spread within the country.
Fears increased further after another official stated that it was not a “question of if […] but when” coronavirus would become a pandemic.
Traders retreated to the safe-haven dollar, allowing the currency to edge higher against the pound.
Looking ahead, head of multi-asset strategy at Mizuho Bank, Peter Chatwell said:
“The significant dovish tilt being priced in by markets from the FOMC may not materialise and that might cause the next leg of the dollar rally.”
Meanwhile, Sterling sentiment slumped on increased expectations of a Bank of England (BoE) rate cut this year.
The pound is also being pressured by speculation that, March’s budget may disappoint, with some analysts doubtful there will be enough increases in spending to stimulate Britain’s economy.
The Institute for Fiscal Studies think tank stated that the Chancellor should not rewrite fiscal rules before the budget and make it clear any spending increases will result in more tax.
Mizuho’s head of hedge fund sales, Neil Jones noted:
“My sense is the market is pulling back on long pound positions originally destined to run into an upbeat expansionary fiscal stance in next month’s budget.”