Dollar Expected to Benefit from Dovish RBA Governor Lowe Remarks, ECB Policy Decision

The Euro is struggling Tuesday morning as investors position themselves ahead of Thursday’s key policy meeting. Central bank policymakers are facing growing pressure on how to protect the Euro Zone economy from a protracted slowdown. A dovish Governor Lowe could trigger a volatile response in the AUD/USD if he acknowledges that weakening housing market prices could increase the chances of an RBA rate cut later this year.
James Hyerczyk
USD Dollar

The U.S. Dollar Index continues to push toward a two-week high early Tuesday as investors show little reaction to Monday’s drop in U.S. Treasury yields, choosing instead to focus on Thursday’s European Central Bank (ECB) interest rate decision and monetary policy meeting.

Despite Monday’s drop in rates, higher U.S. bond yields have kept the greenback well bid over the past few days. This has helped make the dollar a more attractive assets relative its peers. Essentially, it has been the widening of the interest rate differential that has investors moving capital into the U.S. Dollar.

The dollar has been supported since last Thursday’s release of the latest U.S. Gross Domestic Product report, which showed stronger-than-expected fourth-quarter gross domestic product growth. This news has eased fears of a loss in economic momentum, while raising the odds of at least one Fed rate hike in 2019.

While Treasury yields have been the primary driver of the U.S. Dollar’s strength against the major currencies, it has been the weaker Euro that has been underpinning the U.S. Dollar Index. The index, which is the dollar versus a basket of currencies, is heavily weighted by the Euro. So when volatility drives the Euro lower, the index posts strong gains.

ECB Meeting Big Concern

The Euro is struggling Tuesday morning as investors position themselves ahead of Thursday’s key policy meeting. Central bank policymakers are facing growing pressure on how to protect the Euro Zone economy from a protracted slowdown. Given the previously applied stimulus measures that failed to generate the desired results, the ECB is essentially out of bullets so they are going to have to be creative if new stimulus measures are called for.

Today’s weaker price action suggests investors expect the ECB to offer no surprises, which means investors should expect to see a dovish tone.

Aussie Dollar Steady on RBA Decision, but Governor Lowe Could Rock the Currency

Early Tuesday, the Reserve Bank of Australia (RBA) held its official interest rate at 1.5 percent for the 27th consecutive meeting despite continuing signs of the economy is struggling.

The RBA continues to expect unemployment to edge down to 4.75 percent and for the economy to grow by 3 percent in 2019, but on Wednesday, RBA Governor Philip Lowe is expected to address the housing market and its impact on the economy. A dovish Governor Lowe could trigger a volatile response in the AUD/USD if he acknowledges that weakening housing market prices could increase the chances of an RBA rate cut later this year.

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