USD recovers against JPY, EUR as risk assets rally – BBH

US Dollar (USD) recovered some of this week’s losses mostly versus Japanese Yen (JPY) and Euro (EUR). Cyclical-sensitive currencies are outperforming, led by Australian Dollar (AUD). Global equity markets are up, bond markets are steady, and gold is firm near record highs. US-EU trade tension and investor concerns over the Fed’s independence were dialed back a notch, BBH FX analysts report.

Fed policy outlook keeps Dollar range-bound

"President Donald Trump said he will not be imposing the tariffs on some European nations that were scheduled to go into effect on February 1 after reaching a 'framework of a future deal with respect to Greenland'. Meanwhile, the US Supreme Court hearing related to President Trump’s efforts to fire Fed Governor Lisa Cook signaled reluctance to side with the administration. A final court ruling is expected by July."

"Nonetheless, we still see scope for the Fed to further unwind policy restrictiveness this year. First, upside risks to prices are fading. The January Fed Beige Book noted that 'firms expect some moderation in price growth'. Second, downside risks to employment remain high. Excluding the non-cyclical health care and social assistance sector, private nonfarm payrolls fell -1.5k in December and are down on average -19.4k in the three months to December."

"Fed funds futures price little chance of a cut at the next three FOMC meetings (January 28, March 18, and April 29). A 25bps cut is 80% priced in for the June 17 meeting, while markets imply a total of nearly 50bps of easing by year-end. In contrast, most other major central banks are done easing. As such, relative monetary policy trend means the dollar index (DXY) is unlikely to sustain a break above the upper end of its trading range in place since June."