Dollar Rally May Ease with Normalization of Currency Markets: ING
On Monday, the US dollar continued its upward movement, maintaining the trend from the holiday season and breaking traditional seasonal patterns. Despite a brief rise in US Treasury bonds at the end of December, the strength of the dollar carried over into the new year, creating downward pressure on European currencies.
According to ING analysts, a slight softening in the dollar's momentum may be observed this week as normal market conditions return and forex liquidity increases. While technical indicators suggest the recent rally may have become overstretched, Donald Trump's upcoming inauguration is likely to continue directing investors toward the safety of long dollar positions.
Historically, January and February have been strong months for the dollar, which may further bolster its position. This week, the focus is expected to shift back to economic data. Following the hawkish stance of the December Federal Open Market Committee (FOMC) meeting, the threshold for data negatively impacting the dollar has risen. Market pricing indicates a potential interest rate cut in March; 12 basis points (bp) are already priced in, with 17 bp for May and 25 bp for June.
Comments from FOMC members Mary Daly and Adriana Kugler expressing concerns about inflation contributed to the hawkish narrative and may provide a positive backdrop for the dollar should the Fed reiterate its inflation target.
The US will release December employment data on Friday. Estimates forecast a payroll increase of 140,000, with the unemployment rate remaining steady at 4.2%, aligning closely with consensus forecasts. This anticipated outcome will be consistent with expectations that the job market is gradually cooling, which has influenced the Fed's projection of only two interest rate cuts by 2025.
This week will also see the release of JOLTS job openings, the ISM services index, and the minutes from the FOMC meeting. According to ING, while technical indicators may point to a potential correction or slowdown in the dollar's rally, strong buying interest is expected to remain in any downturns. The target of 110.0 for the Dollar Index (DXY) is still seen as attainable in the coming weeks, reflecting that the tactical position on the currency has not changed since last week.