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Dollar Holds Gains After Fed Signals Further Patience

Investing.com -- The dollar was holding on to gains early Thursday in Europe after the Federal Reserve poured cold water on the idea of cutting interest rates any time soon.

Fed Chair Jerome Powell said at his regular press conference that Fed officials “don’t see a strong case for moving in either direction,” indicating that it believes the weakness of inflation and private demand in the first quarter will be temporary.

His comments, which pushed back against public lobbying for lower rates from President Donald Trump, triggered a sell-off in U.S. Treasuries and stocks and reversed more than one-third of the dollar’s slide over the previous three days.

At 03:00 AM ET (0700 GMT), the dollar index, which measures the greenback against a basket of six major currencies, was at 97.428, up nearly 0.5% from before Powell's comments.

The dollar’s rebound was capped by more data suggesting patches of weakness in the economy. The Institute for Supply Management’s manufacturing index for April fell more than expected on Wednesday, while the Chicago Purchasing Managers Index had slumped on Tuesday. Balancing that, the Conference Board’s consumer confidence index had risen more than expected.

“There remains a risk that a cut over the medium term may be necessary to support the economy, given a faster than anticipated dissipation in tax cut stimulus tailwinds,” said Sophia Ferguson, senior portfolio manager at State Street (NYSE:STT) Global Advisors, adding that the market is “fair” to expect a 25 basis-point cut some time this year. Even so, she acknowledged that “a significant downward revision to the economic forecasts is necessary to justify this course of travel.”

The Fed is followed today by the Bank of England’s Monetary Policy Committee meeting. While the the BoE is overwhelmingly expected to keep interest rates unchanged, analysts argue that its statement could be tilted to preparing markets for an interest rate hike later in the year, especially if the uncertainty over Brexit recedes.

In the short term, though, that uncertainty is still high. The Conservative Party of Prime Minister Theresa May is set for heavy defeats at local elections later today that will raise the pressure on her to abandon her strategy of seeking a cross-party consensus on Brexit, most likely in the form of a customs union with the EU.

The pound hit its highest in nearly a month against the euro in early trade on the back of weaker-than-expected German retail sales data for March. A string of manufacturing and construction PMI reports in the course of the morning may change that.

Elsewhere, the dollar was up a fraction against the yen, and down a little against the Aussie and kiwi.

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