The U.S. dollar continued its upward trajectory on Monday, continuing the holiday season trend and defying traditional seasonal patterns.
Despite a brief rise in U.S. Treasuries in late December, dollar strength persisted into the new year, with European currencies coming under downward pressure.
According to ING analysts, as normal market conditions resume this week and liquidity in the foreign exchange market increases, there could be a slight slowdown in the dollar’s momentum.
Technical indicators suggest the recent rally may be excessive, but the impending inauguration of Donald Trump is likely to keep investors inclined toward the safety of long dollar positions.
Historically, January and February have been strong months for the dollar, which could further strengthen its position.
Attention should shift to economic data this week. Following the hawkish stance of the December Federal Open Market Committee (FOMC) meeting, the threshold for data to have a negative impact on the dollar was raised. Market prices indicate a potential rate cut in March, with 12 basis points (bps) already priced in, 17 bps for May and 25 bps for June.
Comments from FOMC members Mary Daly and Adriana Kugler expressing concerns about inflation added to the hawkish rhetoric and could provide a bullish backdrop for the dollar if the Fed reaffirms its inflation mandate.
The United States will release December jobs data on Friday, with projections suggesting payrolls rose by 140,000 and the unemployment rate held steady at 4.2%, closely aligning with consensus estimates. This anticipated result would match the Federal Reserve’s expectations of a gradual cooling of the labor market, which influenced its decision to project only two rate cuts in 2025.
This week will also see the release of JOLTS jobs, the ISM Services Index and FOMC meeting minutes.
Despite technical signs pointing to a potential correction or slowdown in the dollar’s rally, buying interest on the dips is expected to remain strong, according to ING. The 110.0 target for the Dollar Index (DXY) is still considered achievable in the coming weeks, reflecting the unchanged tactical stance on the currency from the previous week.
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