The Federal Reserve maintained interest rates at 1.75% with some dovish elements on inflation.

The Federal Reserve maintained interest rates at 1.75% with some dovish elements on inflation.

The dollar retreated marginally from 9-week highs but maintained a firm tone as high liquidity helped provide defensive support.

Risk appetite deteriorated again in Asian trading on Thursday as coronavirus fears increased again with fresh demand for the yen and Swiss franc. Sterling was little changed ahead of Thursday’s Bank of England rate decision.

The Federal Reserve maintained interest rates at 1.75%, in line with consensus forecasts, and with a 9-0 vote. According to the statement economic activity had been moderate while the labour market had remained strong. Business investment and exports remained weak, and the pace of consumer spending was downgraded to moderate from strong previously. Underlying inflation remained below 2.0% and the committee will monitor muted inflation pressures in order to assess the appropriate policy stance. Although close to expectations, there were a couple of dovish elements on inflation and the dollar edged lower with major barriers to any rate hike.

Chair Powell reiterated that the Fed is not satisfied with inflation running below 2.0%, but he also stated that there was room for cautious optimism over the global outlook. The dollar edged lower on the inflation comments, but the Euro was unable to make much headway with EUR/USD holding just above 1.1000 on Thursday.

In comments on Wednesday, Chinese President Xi stated that containing the coronavirus remains a severe and complex task. Meanwhile the Hubei Governor stated that the situation in Huanggang is especially severe. Risk appetite remained fragile and Treasuries edged higher ahead of the Federal Reserve policy statement. Yields dipped lower following the statement, but the dollar was little changed in an immediate reaction and USD/JPY consolidated just above 109.00.

Confidence stumbled again in Asian trading on Thursday as the number of coronavirus cases continued to increase and disruption to air travel intensified. The Chinese yuan weakened sharply to near the 7.000 level amid expectations of a sharp downward adjustment to Chinese growth forecasts. US equity future declined, and Asian markets also came under further pressure to 7-week lows while Chinese markets remained closed. USD/JPY traded just below 109.00 in early Europe with EUR/JPY below 120.00.

Nationwide reported that house prices increased 0.5% for January with the year-on-year increase at 1.9% from 1.4%, the strongest reading since November 2018. Underlying trade reservations continued, however, with reports that EU’s Barnier saw the risk of cliff-edge talks on trade and fisheries at the end of 2020. The European parliament approved Brexit withdrawal terms and Brexit will go ahead as scheduled on Friday.

The UK currency was unable to make headway, especially with a lack of commitment ahead of Thursday’s Bank of England policy statement. GBP/USD did find some support below 1.3000 and settled fractionally above this level while GBP/EUR weakened slightly to near 1.1800.

Markets are continuing to place a near-50% probability that the Monetary Policy Committee will cut interest rates to 0.50%. As well as the decision, markets will monitor the vote split, statement and forward guidance. The Lloyds business confidence index strengthened sharply to 23 from 10 previously, but Sterling was unable to make any headway in early Europe.

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