The greenback has kicked off 2023 by trying to stabilise above recent lows set in the dying days of last year.
It suffered heavy losses for the most part of the prior quarter en route to still posting an advance of around 9% on the year.
It should be noted that December is seasonally a poor period for USD but the hawkish hike from the Fed actually saw buyers gain a slightly surer foothold, albeit after making fresh cycle lows. Certainly, higher US Treasury yields through the last month of 2022 underpinned some support for the world’s reserve currency.
After a few weeks of drifting sideways, the 1.1% gain in the DXY livened up FX markets on the first trading day of 2023, only to unwind much of yesterday’s advance since.
A strong start to the new calendar year for the dollar is very much in keeping with seasonal trends which typically see the USD rally in January.
Some analysts point to the first month of the year being its strongest month of the entire year over the past 25 years or so.
Dollar bears await death cross
However, perhaps of greater immediate significance, charts are showing the potential for a “death cross” as the 50-day and 200-day simple moving average converge.
Such a technical event may trigger the next leg down for this US dollar benchmark index.
FOMC minutes and jobs data in view
The Fed story will remain a key driver with money markets pretty steadfast in pricing more rate hikes up to a peak rate around 5%.
This pricing will no doubt be challenged by top tier data this week including the monthly US non-farm payrolls report.
But focus today turns to the job vacancy numbers which are forecast to decline and indicate a gradual cooling off in the labour market.
Consensus looks for the lowest reading since June 2021. How quickly the tight US labour market is unwinding will be crucial for policymakers and markets.
Also, later today sees the release of the FOMC minutes from the December meeting.
This should shed some light on how policymakers are weighing early signs of slowing inflation with persistently strong jobs data.
Any worries about a slowdown and potential painful recession will be seized on and see dollar selling.
Shrugging off growth concerns and officials reaffirming their inflation fighting credibility will see the opposite.
Wobbly Euro kicks off 2023
Yesterday saw German inflation fall back sharply to 8.6% in December from 10% in November, against expectations for 9.1%. This knocked the euro strongly lower, closing down 1.1% and its fastest fall in more than two months.
Eyes will be on data for France and then the eurozone as a whole which release its inflation number on Friday morning.
After a sustained period of narrow, sideways range trading in EUR/USD through December, loss of support in the high 1.05/1.06 zone tilted near-term technical risks to the downside. A solid break below range support at 1.0575 targets a drop back to the low 1.04s.
But buyers can regroup with 1.05153 potential support, that is the 50% level of the 2022 decline.
Euro bulls will also the recent formation of the “golden cross”, when EURUSD’s 50-day SMA broke above its 200-day counterpart, would offer further vindication for more upside.