The US currency started the new week with mixed movements, but overall the greenback is still in a downtrend. Nevertheless, analysts expect the greenback to recover in the short and medium term, as there are no prerequisites for a further depreciation of the USD.
On Monday, January 9, the dollar sharply fell against other currencies. At the same time, the greenback showed multidirectional dynamics, as investors were assessing a further increase in the Federal Reserve's rate. Traders and investors analyzed several economic data published last week. Against this background, many traders and analysts came to the conclusion that the Fed will slow down the pace of interest rate hikes, as most of the macro data was positive.
According to the December US unemployment report, the jobless rate unexpectedly declined to 3.5%. This was 3.7% back in November 2022. At the same time, the number of people employed in the non-farm sector of the US economy grew by 223,000, although projections were at 200,000. According to experts, the current US labor market data, published last Friday, January 6, is a positive thing for the USD. According to preliminary forecasts, it gives the central bank an opportunity to continue raising rates.
Credit Agricole currency strategists believe that the dollar will slightly fall ahead of the US inflation data and Fed Chairman Jerome Powell's speech. The greenback will soon restore its lost positions and will move on to new heights. In this backdrop, the euro "looks vulnerable" and may be at a loss, the bank noted.
Earlier, the euro showed some volatility in the first trading week of 2023, forcing investors to doubt its succeeding growth. Its initial strong momentum started to fade, and rather weak data on eurozone inflation caused doubts about the need to maintain the hawkish policy of the European Central Bank. In this situation, strong US labor market data contrasts sharply with EU macro data. Against this background, market expectations of further monetary tightening by the Fed are intensifying.
The economic data on the US labor market, which turned out to be lower than the expected figures on hourly earnings, became the main driver of the USD buying trend and some dollar weakness. At the same time, investors are cautious in their forecasts about the greenback's dynamics and the Fed's further actions. According to experts, inflationary pressure in America may weaken in the near future. This will give the central bank some leeway on the interest rate, analysts say. On this background, analysts at Rabobank expect that 2023 will provide plenty of opportunities for USD bulls to become re-engaged.
A sharp decrease in long positions on USD and an increase of such on the euro, recorded at the end of 2022, indicates that the uptrend in the EUR/USD pair can change. The reason for this is the unstable trading conditions which persist in the coming year. Presently, the impulse caused by the massive purchases of the EUR/USD pair has lifted it from its current values and sent it into a high range. However, experts doubt that the pair can stay at current levels for long. On Monday morning, January 9, EUR/USD was trading at 1.0690, trying to move out of the range.
According to analysts' estimates, if the pair settles above 1.0650 this week, the financial market can count on a bullish reversal for the dollar. Thus, the pair, despite staying in the current price range, is capable of exceeding 1.0700. Rabobank maintains its 3 month EUR/USD forecast of 1.0300. At the same time, the bank keeps the short-term forecast for the EUR/USD pair at 1.0500. According to experts, this figure is relevant for a 1 month forecast.
Macro data on US annual inflation for December 2022 will be released next week. According to preliminary forecasts, the rate was actively declining in December 2022 and reached 6.5%. Recall that the annual inflation rate in America was 7.1% in November 2022. According to analysts, in early 2023, US inflation will slow down for the sixth straight month after peaking at 9% in June 2022.
