• USD strengthened modestly ahead of FOMC meetings
• EURGBP weakens as ECB keeps interest rate unchanged
• Beijing and Shanghai officially joined the Digital Yuan Project
Despite a notable 7 bps drop in the 10-year Treasury yields, USD slightly strengthened as DXY Index rose 0.13% during Monday’s trading session. It was primarily led by EURUSD price action which declined about 30-pips. The Federal Open Market Committee (FOMC) ’s two-day meeting is expected to reach a decision to keep rates within 0% to 0.25%. Moreover, the pace of monthly bond purchase is also expected to be kept at $120 billion. As the Fed stands pat on the monetary policy, investors will keep their attention on the tone from the central bank, expecting key information on the economic outlook. Recently, however, rising cases have exerted certain pressure over short term recovery, but the outlook has appeared more and more sanguine over the medium to long term. This will likely encourage the Fed to tighten policy sooner than expected, despite in December that FOMC had indicated the likelihood to remain on hold through 2023.
In Europe, both the Euro and the Pound found themselves struggling but EUR seemed to be weaker in this pair. UK Prime Minister Boris Johnson suggested the government to relax some measures before mid-February, but health officials have downplayed his suggestions and expressed the likelihood to extend the lockdown period. Pound investors need to keep a close eye on the UK unemployment rate to be released soon. If it matches the consensus of 5.1%, it will possibly stimulate further concern. As for the Euro, ECB left the monetary policy unchanged again during its first meeting of 2021, stirring disappointment among investors. Furthermore, Germany’s business climate index hit a 6-month low as companies remain cautious about the recovery outlook.
In China, PBOC is accelerating its pilot on the digital Yuan. Beijing and Shanghai, two largest cities in China, will soon be joining the project. Digital Yuan is overseen by PBOC and its potential replacement of paper currencies will provide greater visibility to the government on circulation, e.g., tracking any illicit flows of funds, and a quicker channel to issue changes on monetary policies. It uses a two-layer architecture a two-tier delivery system to assure that it can be used offline. It also works independently from China’s existing banking system and will be backed by the nation’s credit to ensure price stability. PBOC also hopes to utilize the digital perspective to encourage more countries to use Yuan and thus internationalizing the currency.