On Monday the US dollar maintained its upward trend, continuing the momentum from the holiday season and defying traditional seasonal patterns.
Despite a brief rise in US Treasuries at the end of December, the strength of the dollar continued into the new year, with European currencies experiencing downward pressure.
As normal market conditions resume this week and foreign exchange liquidity increases, there may be some easing of the dollar's movement, according to analysts at ING.
Technical indicators suggest that the recent rally may have been overdone, but the next inauguration of Donald Trump is likely to keep investors moving towards long positions safety dollar.
Historically, January and February have been strong months for the dollar, which could provide additional support to its position.
The focus is expected to shift back to economic data this week. After a hawkish stance at the Federal Open Market Committee (FOMC) meeting in December, the threshold for data to negatively impact the dollar was raised. Market prices are pointing to a possible rate cut in March, with 12 basis points (bp) already included, 17bp for May, and 25bp for June.
Comments from FOMC members Mary Daly and Adriana Kugler, expressing concerns about inflation, have added to the hawkish narrative and could provide a supportive backdrop to the dollar if the Fed re-emphasizes its inflation mandate. .
The US will release December jobs data on Friday, with projections suggesting a payroll increase of 140,000 and the unemployment rate holding steady at 4.2%, closely matching consensus estimates. This expected result would be in line with the Federal Reserve's expectations of a gradual cooling in the labor market, which influenced its decision to plan just two rate cuts in 2025.
This week will also feature the release of JOLTS job openings, the ISM service index, and the FOMC meeting minutes.
Despite technical indicators pointing to a possible correction or slowdown in the dollar's rally, it is expected that buying interest will remain on strong dips, said ING. The target of 110.0 for the Dollar Index (DXY) is still considered achievable in the coming weeks, reflecting the unchanged tactical stance of the currency from the previous week.
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