- The dollar faced a decline against the euro and yen on Monday, influenced by mixed U.S. economic data and anticipation surrounding the Federal Reserve’s potential tapering cycle.
- Despite positive initial reactions to strong labor market data on January 5, concerns arose as investors delved into underlying factors, including a notable slowdown in the U.S. services sector employment, indicating potential weaknesses in the job market.
- Eyes are now on the upcoming release of consumer price inflation data for December on January 11, as it is expected to offer crucial insights into the timing of the Federal Reserve’s potential interest rate adjustments.
The dollar fell against the euro and the yen on Monday as investors weighed mixed U.S. economic data over the past week and looked ahead to the release of a key inflation gauge for further clues about when the Federal Reserve is likely to begin a tapering cycle. interest rates.
The dollar initially jumped to 103.11 on Friday, Jan. 5, its peak since Dec. 13, after labor market data showed employers hired 216,000 workers in December, beating economists’ expectations, while the average hourly payment increased by 0.4% per month.
However, the US currency then fell as investors focused on some of the underlying factors in the jobs report. Also, another report showed that the US services sector slowed significantly in December, with employment falling to its lowest level in nearly 3.5 years.
“Friday’s nonfarm payrolls data was mixed. The headline numbers were quite strong and good, but there were a lot of subsets within the data that also pointed to more weakness in the labor market,” said Helen Given, currency trader at Monex USA.
According to her, the labor market in the United States is definitely weakening.
At the end of 2023, the dollar indices DXY and BBDXY are declining by approximately 1% and 2%, respectively. However, the US currency is still overvalued by 14-15% in terms of the real effective exchange rate, write strategists at Goldman Sachs. And the dollar has fallen even further: according to the bank’s estimates, in the fall of 2022 its real effective exchange rate exceeded the fair estimate by about 20%.
“We enter 2024 with the dollar still strong,” write experts at Goldman Sachs. “However, given the significant global disinflation that is occurring against the backdrop of strong global economic growth, the prospect of lower interest rates in the United States and the robust appetite of investors for risk, we expect further decline in the dollar, although it will be relatively gradual.”
The main economic release this week will be consumer price inflation data for December, which will be published on Thursday, January 11. Headline inflation is expected to rise 0.2% for the month, which equates to an annual increase of 3.2%. Fed funds rate futures traders are forecasting a Fed rate cut cycle to begin in March, although the likelihood of such a move has diminished. Traders now see a 66% chance of a rate cut in March, up from 89% a week ago, according to the FedWatch tool.
