USD begins the second month of the year stronger. Markets responded to the coronavirus by flocking to safe-haven assets (USD, Gold, JPY). Although risk sentiment has improved, USD remains high until there is a cure or the outbreak recedes. The Federal Reserve continues with a neutral stance on monetary policy and if they lower rates again, USD will drop. Trade tensions have eased with China and President Trump will now focus on his re-election campaign. USD is forecasted to remain firm in Q1.
CAD remains weak from the start of the year due to oil prices lower and the central bank under pressure to cut interest rates. Increased concerns that the virus outbreak will reduce demand is affecting oil prices. Markets have reduced the chances of a rate cut in Q1 to 11% currently (from 25% previously). However, the Bank of Canada is open to a rate cut if recent weakness continues. Geopolitical concerns causing risk-aversion, so CAD is vulnerable to safe-havens. CAD is forecasted to remain weak versus most G-10 currencies in Q1.
EUR is trending lower for the remainder of Q1 as fears of a no-deal Brexit have increased. Germany is the Eurozone’s largest economy and the manufacturing sector is slowing after factory orders dropped lower than expected to end 2019. Germany narrowly avoided a technical recession in Q4. Markets have priced in a rate cut from new central bank President Christine Lagarde in March. EUR/USD is forecasted to continue weaker in Q1; meanwhile, EUR/CAD has some support due to CAD weakness.
GBP also trending lower as tensions between the European Union and United Kingdom are higher. Tougher financial regulations on the City of London, and Prime Minister Johnson’s refusal to accept European Union standards to secure a trade deal weighing on GBP. However, business optimism and construction activity improved after the general election results. GBP is forecasted to be stable and defensive in Q1 as markets wait for the next monetary policy decision from new Governor Andrew Bailey in March.