On Monday, the US dollar maintained its upward trajectory, continuing the holiday trend and defying traditional seasonal patterns.
Despite a brief rebound in US government bonds in late December, the dollar’s strength continued into the new year, with European currencies experiencing downward pressure.
As normal market conditions return this week and currency liquidity increases, there could be a slight weakening in dollar momentum, according to ING analysts.
Technical indicators suggest the recent rally may be overextended, but the impending inauguration of Donald Trump will likely continue to tilt investors toward the safety of long dollar positions.
Historically, January and February have been strong months for the dollar, which could further support its position.
The focus is expected to shift back to economic figures this week. Following the aggressive stance taken at the December Federal Open Market Committee (FOMC) meeting, the threshold for data that negatively impacts the dollar has been increased. Market prices indicate a possible rate cut in March, with 12 basis points (bp) already priced in, 17 bp for May and 25 bp for June.
Comments from FOMC members Mary Daly and Adriana Kugler expressing concerns about inflation have contributed to the hawkish narrative and could provide a bullish backdrop for the dollar if the Fed re-emphasizes its inflation mandate.
The US will release December jobs figures on Friday, with projections pointing to a 140,000 wage increase and the unemployment rate holding steady at 4.2%, closely in line with consensus estimates. This expected outcome would be in line with the Federal Reserve’s expectations of a gradual cooling of the labor market, which influenced its decision to foresee only two interest rate cuts in 2025.
This week will also see the release of the JOLTS vacancies, the ISM service index and the FOMC meeting minutes.
Despite technical signs pointing to a possible correction or slowdown in the dollar’s rally, buying interest on dips is expected to remain strong, ING said. The 110.0 target for the Dollar Index (DXY) is still considered achievable in the coming weeks, reflecting the unchanged tactical stance against the currency from the previous week.
This article was produced with the support of AI and reviewed by an editor. For more information see our General Terms and Conditions.
