Market Overview

The Greenback still has a moderate support from safe-haven US bonds buying, as many investors continue to cash out their funds from shares, which have dropped down fast. The ten-year US Treasury yields hit a record low at 1.291% this morning; the previous historical low was at 1.321% in July 2016.

This clearly indicates a panic demand for government debt securities, but a synchronised demand is now increasing for securities denominated in other currencies as well. Similar "compensating" investment models have already led to an upswing to 1.0945 in EUR/USD, as was expected before. The single European currency movements are mirrored in the corresponding yields for the bonds in Germany (below -0.5% for the ten-year bonds) and in France (below -0.24%), while the yields grow in Italy (from 0.90% a week ago to 1.038% this afternoon), as investors seek at least a small additional compensation for the potential coronavirus risk on the Italian economy.

The point is that the Dollar is partially pressured by rising expectations of possible interest rates cut response from the US Federal Reserve (Fed). Money markets and, in particular, the Chicago Mercantile exchange (CME) are now pricing a roughly 50-50 chance of the Fed's monetary policy easing by 0.25% on March 18, and they even bet more on a hypothetical April rate cut decision.

Further declines in the US and global stock indexes significantly increase the likelihood of a decisive action by the US regulator to support the markets and the economy. On the other hand, the markets may have time to recover properly over the next three weeks, and in this case the probability of fulfilling "Trump's dream" of another Fed's rate cut becomes much less of a reality.

As for the Fed's officials themselves, they do not remain silent at all, but speak out in different ways. Atlanta Fed president Raphael Bostic, who is not a voting member on the Federal Open Market Committee (FOMC) this year, said cutting rates isn't his central case scenario right now, citing the ongoing strength of the labour market in particular. But he expressed his opinion already a week ago, when the stock markets were much higher, that he was just a little worried and that there were no clear sign of strong downside correction yet. Minnesota Fed President Neel Kashkari, well-known as a "dove", who also does have a FOMC vote this year, also said seven days ago that he expected rates to stay on hold for "three months, six months, even longer."

St. Louis Fed President James Bullard told CNBC last Friday, February 21, that "hopes for a rate cut due to the Covid-19 outbreak were overblown". "There's a high probability that the coronavirus will blow over as other viruses have, be a temporary shock and everything will come back," Bullard said, but it was at odds with further developments in the markets.

The Vice Chair Richard Clarida stated this Tuesday, February 25, that the regulator "continued to monitor the impact of the coronavirus on the US economy but still too early to assess the growth impact from the epidemic, or whether it will lead to a material change in its outlook". This gave some rise to speculations that the dovish Fed bets are already priced in by the markets, as it was a most uncertain comment from the Fed official, and it gave little space for the situation to be reassessed before March 18.

At least, most of the market participants continue to bet on a quarter-point rate cut in the second half of the year, and that may keep some tension among the holders of Dollar-denominated assets, especially taking into account that other central banks do not have enough opportunities to loosen their monetary policy any more.

ECB's De Guindos will speak at 16.00 GMT later today, while Chicago Fed President Mr Charles Evans will speak at 16.30 GMT and FOMC member Mrs Loretta Mester's comments are scheduled to take place at 20.30 GMT. Just after these remarks, FOMC member Mr James Bullard will provide further comments at 14.15 GMT tomorrow.

Market participants may also keep in mind the surprisingly weak US Purchase Manager's Index (PMI) data that was issued last Friday, and they need some fresh positive data in order to be more confident when it comes to their the future reasons to accumulate more Dollar assets or if they see more negative developments so they may convert them into Euro assets or to some other investment options. Today's Gross Domestic Product (GDP) release for the 4Q2019 in the US is unlikely to add anything new or significant to their view, since investors are more concerned about the condition of the US economy indicators in 2020, and not in the pre-coronavirus ideal past. Even Michigan Consumer Expectations and Current Conditions indexes for February, which will be released on Friday, could make a more solid impression on the markets. However, some repositioning of market participants in the US Dollar before and soon after the data is released, may be correlated in time with the release of GDP data too.

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