Dollar Weakens Ahead of Stimulus Talks; Pound Strengthens

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Dollar bills

The dollar headed lower in early European forex trade on Monday, on hopes for a fiscal stimulus package. Traders were looking forward to Congress finally agreeing on a fiscal stimulus package ahead of the Federal Reserve’s policy meeting. 

At 3:50 AM ET (0750 GMT), the Dollar Index was down 0.4% at 90.562. It was trading near a two-and-a-half year low.

USD/JPY was down 0.1% to 103.98, EUR/USD was up 0.4% to 1.2155. The risk-sensitive AUD/USD climbed 0.4% at 0.7564. This was ahead of the release of the Reserve Bank of Australia‘s minutes from its latest policy meeting, due Tuesday.

The safe-haven dollar has been under pressure as hopes for a global economic recovery from Covid-19 grew. Positive vaccine news and hopes for the latest U.S. stimulus measures were increasing investors’ risk appetite.

Later in the day, a bipartisan bill for a $908 billion Covid-19 relief package will be introduced in Congress. It could be split into two separate packages. This is in order to maximize the chances of something getting through tough differences between Republicans and Democrats. 

Moreover, the U.S. Food and Drug Administration recommended approval on Friday of Pfizer’s Covid-19 vaccine for emergency use. It was paving the way for vaccinations to get underway in America this week.

The last Federal Reserve meeting of the year is also on this week’s agenda.  The central bank is likely to keep interest rates low for an extended period.

Stocks on the Move

The GBP/USD pair rose 1.2% to 1.3386, rising after Britain and the European Union extended talks. This was past Sunday’s self-imposed deadline in order to try and strike a Brexit trade deal.

A trade agreement has to be struck by the end of the year. Or else, free movement of goods, services, people, and capital between the two zones will come to an abrupt end. The extension of the negotiating time frame, however, suggests an increased political interest in avoiding that outcome.

According to ING, it sees a deal as more likely than not. This should push GBP/USD above the 1.35 level, towards 1.37.

Furthermore, the Bank of England also holds a policy meeting later this week. But it is not likely to move while the Brexit negotiations continue. In November, it has already extended its QE program by 150 billion pounds. 

Meanwhile, the British pound rose against the dollar and euro. This is in hopes that Britain and the European Union will secure a free trade agreement. That came after their decision to extend negotiations beyond the Sunday deadline.

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