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The U.S. dollar continued to show strength Wednesday, helped by comments from the head of the U.S. central bank that the outbreak of the deadly coronavirus in China has done little to alter the expected path of U.S. interest rates.

At 03:10 ET (0810 GMT), EUR/USD traded at 1.0916, just off Monday’s four-month low. GBP/USD traded at 1.2969, just 0.1% higher. The U.S. Dollar Index, which tracks the greenback against a basket of six other currencies, stood at 98.627, up 0.1%, approaching the levels last seen in mid-October.

Overnight, U.S. Federal Reserve Chairman Jerome Powell said in remarks before U.S. lawmakers that the central bank is closely monitoring the fallout from the deadly coronavirus outbreak in China, “which could lead to disruptions in China that spill over to the rest of the global economy.”

However, Powell stopped short of saying the disease had changed the central bank baseline outlook for the U.S. economy.

“The FOMC believes that the current stance of monetary policy will support continued economic growth, a strong labor market and inflation returning to the committee’s symmetric 2% objective,” Powell said. “As long as incoming information about the economy remains broadly consistent with this outlook, the current stance of monetary policy will likely remain appropriate.”

The January 2021 Fed funds futures currently suggests the market is pricing in at least one rate cut of 25 basis points by the end of 2020, but employment growth has been a lot stronger than expected over the last couple of months and sentiment surveys have tended to surprise to the upside.

Even if the Federal Reserve does make a quarter-point cut this year - one is fully priced in by September - a base rate of then 1.5%for fed funds would still be considerably higher than what most other developed market central banks can offer.

The flip side of dollar strength is the weakness of the euro.

“EUR/USD continues to be weighed down by concern about the coronavirus and its impact on the eurozone economy,” said analysts at ING in a research note. “At this point, a break below the 1.0900 mark (also, a multi-year low) seems in the cards, especially as we expect a round of grim eurozone data this week.”

The first grim data point is likely to be the December industrial production figure for the euro zone, at 05:00 AM ET (1000 GMT), which is expected to have fallen by 1.6% month in December, an annual fall of 2.3%.

Also of note, Sweden's central bank left its benchmark interest rate unchanged, as expected, after surprising the market by raising in December by 25 basis points to 0%, ending five years of negative rates.

"The minutes from the December meeting emphasised that the Riksbank could cut rates again if needed," said ING, "although in reality we think the bar to either cut, or indeed hike rates anytime soon is set relatively high."

Thus any move would have an impact of the Swedish krona. At 03:10 AM ET (0810 GMT), EUR/SEK traded at 10.5076. The krona has risen around 0.3% against the euro since the Riksbank hiked

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NZD/USD rebounds to one-week high

The Reserve Bank of New Zealand kept its benchmark rate unchanged at 1% at this morning’s policy meeting while noting that the coronavirus is emerging as a downside risk for the local economy. Already the tourism industry is taking a hit, with Chinese nationals barred from entering the country, and other export markets could suffer.

In addition, the RBNZ adjusted its rate path higher, seeing the June 2020 Overnight Cash Rate (OCR) at 1.01% versus 0.9% previously and the June 2021 level at 1.1%, also from 0.9% prior.

Ahead of the meeting, most analysts were expected a no-change announcement but interest rate markets were implying an 80% chance of a cut, so the unchanged announcement and upward adjustment to the rate path meant the reaction post-meeting was greater than normal. The kiwi surged more than 1% versus the US dollar and Japanese yen, while AUD/NZD fell the most since November 13.

Q1 GDP forecast halved

In the subsequent press conference, Governor Orr mentioned that the Bank has assumed the coronavirus would last six weeks, but doubted there would be a need for policy adjustment due to the virus effect. The Bank had removed half of the expected GDP growth in Q1 from its forecasts. Westpac estimates the virus shock could trim Q1 GDP to just 0.1% while ASB Bank predicts a 0.1% contraction.

NZD/USD rose the most since December 2 and tested the 100-day moving average at 0.6470. The 200-day moving average sits above at 0.6501.

In the first day of his semi-annual testimony, Fed Chairman Jerome Powell said the US economy seemed quite resilient, though the coronavirus outbreak remains an uncertainty. He added that as long as incoming information about the economy remains broadly consistent with the current outlook, the monetary policy stance will likely remain appropriate. He also didn’t mention any shift to current policy thinking that rates will remain on hold throughout 2020.

Most US indices crept higher yesterday, posting modest incremental gains to reach new record highs. The rally was extending during a quiet Asian session, with US indices adding between 0.11% and 0.20%. Asian equities were mixed, with the Japan225 index slipping 0.32% while the China50 index rose 0.03%, and the HongKong33 index gaining 0.17%.

Coronavirus update

Optimists looking at the coronavirus data will focus on the fact that the number of new cases in China rose at the slowest pace since January 30, and the increase in the number of virus-linked deaths slowed to 97 from 108 the previous day. Should we see the number of new cases grind to a halt in the not too distant future, that would a boon for risk appetite.

Powell part two

The data calendar is again quite barren today, with Powell’s second day of testimony the major highlight. He’s not likely to shift from the tone of yesterday’s testimony and it is the Q&A session which will garner more interest.

Euro-zone industrial production probably fell 1.6% m/m in December, wiping out November’s small increase of just 0.2%. ECB’s Lane is scheduled to speak today. The UK reveals its Autumn budget statement while Fed’s Harker speaks before Powell’s testimony.

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• USD/INR registers three-day losing streak.
• Coronavirus headlines seem to drive the trade sentiment while odds of the US-India trade pact add strength to the Indian rupee (INR).
• News from China, the US Fed will be the keys to watch.

USD/INR extends losses, currently around 71.21, -0.10%, as the Indian markets open for trading on Wednesday. The pair recently takes clues from optimism in Asia while paying a little heed to the strong US dollar.

In addition to receding cases of coronavirus infections in China, the global rating agency Moody’s statements also strengthened the INR. Coronavirus outbreak in China is expected to have a minimal impact on the Indian ports its rates due to low China-related throughput they handle. The share of China-linked container cargo is less than 5 percent by volume for the Indian ports it rates. Additionally, manufacturers will likely seek alternative sources of supply for components to the extent that supply chain disruptions in China persist, said the rating giant on Tuesday.

Further, the US President Donald Trump will also visit Indian during late-February and is expected to sign a trade pact (hopefully). Additionally, news from Reuters, quoting the country’s economic adviser Sanjeev Sanyal, also pleased the pair sellers as it said that Indian economic growth is likely to rebound from more than a six-year low of 4.5% in the July-September quarter.While portraying the same, the US 10-year treasury yields rise nearly three basis points to 1.616% with most Asian stocks also in green by the press time.

Moving on, India’s December month Industrial Output, prior and expected 1.8%, could offer immediate direction with the second day of the Fed Chair Jerome Powell’s testimony and China headlines likely keeping the driver’s seat.

Technical Analysis

Unless successfully breaking a downward sloping trend line since January 08, at 71.52 now, prices are less likely to avoid visiting 71.00.

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The New Zealand dollar gained almost 1% against its U.S. counterpart on Wednesday in Asia after the Reserve Bank of New Zealand (RBNZ) left interest rates unchanged as expected and said forecasts showed no chance of a cut this year.

The NZD/USD pair last traded at 0.6456 by 12:05 AM ET (04:05 GMT), up 0.9%.

Meanwhile, the AUD/USD pair traded 0.2% higher at 0.6728 as the Westpac Consumer Sentiment Index jumped by 2.3% to 95.5 in February. In January, the index had fallen by 1.8% to 93.4. Economists had forecast a more modest 1.4% rise.

The U.S. dollar index inched up 0.1% to 98.657. Overnight, Federal Reserve Chairman Jerome Powell said the Fed is watching the coronavirus impact carefully, without hinting that any imminent action was needed, claiming he wanted to "resist the temptation to speculate" about the potential disruptions from the outbreak.

"'What will be the effects on the U.S. economy?' 'Will they be persistent?' 'Will they be material?' That’s really the question," Powell said.

On the data front, the U.S. Labor Department's latest Job Openings and Labor Turnover Survey (JOLTS) report, a measure of labor demand, showed job openings in January fell to about 6.43 million, missing expectations of 7 million.

The EUR/USD pair was little changed at 1.0911. Industrial production figures are due out of the Eurozone later today.

The USD/CNY pair was also near flat at 6.9626. On the coronavirus front, China said the death toll from the coronavirus outbreak rose to 1,113 as of Feb. 11, with 97 additional fatalities reported. Confirmed cases of the disease in mainland China rose to 44,653.

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 Asian currencies found support on Wednesday from a slowdown in the spread of coronavirus, but a strong dollar and caution about the rising death toll kept gains in check, while the New Zealand dollar jumped after the central bank dropped its easing bias.

Hubei, the province at the epicenter of the outbreak, reported the lowest number of new infections since Jan. 31 on Tuesday, with 1,068 new cases. China's senior medical advisor also said the outbreak might be over by April.

The U.S. dollar, which has soaked up safe-haven flows as worries about the coronavirus coincided with data showing the U.S. economy's strength, handed back some gains.

The Australian dollar , among the most exposed globally to China's economic fortunes owing to Australia's export profile, stood a percentage point above the decade low it hit on Monday. It was 0.2% stronger at $0.6727.

The euro (EUR=), also seen as vulnerable to an economic slowdown in China, clambered from a four-month low to trade at $1.0916. The Chinese yuan sat at 6.9677 in offshore trade, just below a week-high it hit overnight.

"Markets are looking at the rate of spread, the rate of infection and thinking that maybe it is leveling out and it could be time to move on," said Sean MacLean, research strategist at Pepperstone, a brokerage in Melbourne.

"But so long as it remains contained in China, and the U.S. feels isolated, the U.S. dollar continues to perform well," he said, which would hold back further gains in Asian currencies against the dollar.

Even if the epidemic ends soon, though, its toll is high.

More than 1,100 people have died in China, about 2% of people infected. The economy has also been upended, with factory closures hitting supply chains from car makers to tech firms.

Worries about the eventual fallout have prompted a big selldown in currencies exposed to China, from the tourism-sensitive Thai baht to the oil-export driven Norwegian krone .

Both have lost more than 4% against the dollar this year and have barely recovered. The Japanese yen , a barometer of risk sentiment by virtue of its safe-haven status, remains strong against most majors and was steady at 109.86 per dollar.

"(A) bad scenario of intensification and spreading of coronavirus could cause a global supply shock," said Steve Englander, head of global G10 FX research at Standard Chartered (LON:STAN).

"Behind our views is the sense that global growth momentum is not nearly strong enough for most EM currencies to brush off the risk aversion that persistent fear of the disease would bring."

The New Zealand dollar jumped 0.7% to $0.6458 after the central bank held interest rates steady, as expected, but forecast holding rates there through the year - reducing the likelihood of future easing.

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