Dollar Shows Resilience Amid Shifting Global Economic Winds

The US dollar has begun 2023 with a surprising degree of stability, a notable shift after significant losses in the final quarter of last year. This resilience is occurring despite expectations of further Federal Reserve tightening and ongoing global economic uncertainties. Analysts are closely watching key economic data releases and geopolitical developments for clues on the dollar's future trajectory.

Key Takeaways

• The dollar is experiencing seasonal strength in January and February.

• Focus is on upcoming US JOLTS job openings data and FOMC minutes.

• Developments in China and falling global energy prices are influencing market sentiment.

• The Euro (EUR) faces headwinds, while the British Pound (GBP) shows mixed signals.

• Central and Eastern European (CEE) currencies are benefiting from lower gas prices.

Dollar's Seasonal Strength and Fed Policy

The dollar has strengthened against most G10 currencies, a stark contrast to the steep declines seen in late 2022. While December is typically a weaker month for the dollar, a hawkish stance from the Federal Reserve provided some support. The market anticipates further Fed rate hikes, with projections suggesting a peak around 4.95-5.00% before potential easing cycles. However, these expectations are likely to be tested in the coming weeks.

Today's economic calendar features the November JOLTS job openings data, expected to show a slight decline. This figure will be crucial in assessing the tightness of the US labor market and its implications for inflation. Later, the December FOMC minutes will offer further insights into the Fed's thinking.

Global Influences: China and Energy Prices

Developments in China, particularly the liberalization of COVID-19 containment policies, are being closely monitored for their potential impact on global growth prospects. While it may be too early for significant fund manager bets, the shift could provide a boost. Additionally, a sharp decline in global energy prices, especially natural gas, is supporting a more optimistic outlook for global growth and has contributed to a positive start for equity markets.

Seasonally, January and February tend to be strong months for the dollar. Analysts favor a modest recovery in the dollar index (DXY), potentially reaching the 106 area in the near term, with a possibility of reaching 108 over the next two months, contingent on Fed policy and global economic data.

Euro and Pound Outlook

The Euro (EUR) has started the year on a softer note, but a sharp decline seems unlikely. The reversal of the high gas price 'terms of trade' story that weighed on the euro last summer, coupled with a more optimistic risk environment and narrowing swap spreads, provides some support. A trading range of 1.0500-1.0750 is anticipated for EUR/USD in the near term, with US jobs data on Friday potentially acting as a catalyst for a breakout.

For the British Pound (GBP), after a volatile December, EUR/GBP appears to be settling above 0.8800. Sterling's performance this year will depend on the Bank of England's tightening pace and the market's expectations for an easing cycle. GBP/USD is viewed with a slightly more bearish outlook, with a target of 1.1650 if US price and wage data surprise to the upside.

CEE Region Benefits from Falling Gas Prices

Central and Eastern European (CEE) currencies are showing renewed strength, largely driven by the significant drop in gas prices. The Czech koruna has reached its strongest level against the euro since 2011, and the Hungarian forint has also benefited. While gas prices have stabilized, potentially limiting further immediate gains for these currencies, the Polish zloty and Romanian leu, which have lagged, could still see further upside.

On the domestic front, the National Bank of Poland is expected to keep rates unchanged. Polish inflation data for December is anticipated to show a continued decline, though a rebound is expected in the following months. Meanwhile, data from the Czech Republic is expected to confirm a deep recession in the region.

Sources

• FX Daily: Seasonal Trends in Focus, Investing.com.