Dollar Edges Lower; Sterling Rebounds After Sharp Selloff

By Peter Nurse

Investing.com - The dollar edged lower in early European trade Monday, with positive news surrounding a potential vaccine helping the market take on more risk. However, ranges are likely to be tight ahead of this week’s Federal Reserve meeting, and the focus is likely to be on sterling and yen movements given political uncertainty.

At 2:55 AM ET (0650 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was down 0.2% at 93.198, with EUR/USD largely flat at 1.1847.

News that AstraZeneca (NYSE:AZN) has resumed late-stage trials of its Covid-19 vaccine candidate, coupled with Pfizer (NYSE:PFE) CEO Albert Bourla saying its candidate has a “good chance” of submitting key data from late-stage trials by the end of October, has created a more positive attitude to risk, hitting the dollar.

Still, investors will exhibit some caution ahead of Wednesday’s Federal Reserve’s policy meeting.

“The Fed story has undoubtedly been bearish for the dollar over the last couple of months, but a little caution may be warranted going forward – with perhaps the Fed’s hands now tied ahead of the November 3rd presidential election,” said analysts at ING, in a research note.

Elsewhere, GBP/USD rose 0.3% to 1.2827, rebounding a touch after having hit $1.2767 on Friday, its lowest since July 24. EUR/GBP traded 0.3% lower at 0.9235, after previously reaching a 5 1/2-month high of 0.9290.

The pound has been under pressure from fears that Britain will end its post-Brexit transition period with no trade agreements.

Prime Minister Boris Johnson's new Internal Market Bill, which unilaterally breaks the Brexit divorce treaty with the European Union signed earlier this year, faces a vote in parliament on Monday. 

“Despite its profound fall in the past few days, we expect the pressure on GBP to continue building ... as until-recently complacent investors adjust to the new reality of a heightened no-deal Brexit risk and start/continue building GBP shorts,” ING added.

“With EUR/USD likely to remain range-bound (and hence giving limited support to GBP/USD), expect GBP/USD to head towards 1.2500 next week (and EUR/GBP to 0.9500).”

Additionally, USD/JPY slipped 0.1% to 106.04, with Japanese Chief Cabinet Secretary Yoshihide Suga poised to become head of Japan's ruling party on Monday and prime minister on Wednesday.

"The focus is on the line-up of his cabinet as well as whether he will call a snap election," said Minori Uchida, chief FX strategist at MUFG Bank, in a Reuters report. "He is saying he will continue and advance Abenomics but it is questionable how much advancement he can make."