Dollar starts 2024 on strong footing, Friday’s NFP eyed

Dollar traders lock gaze on Fed minutes and NFP data

The US dollar began the first trading day of 2024 on a strong footing against its major counterparts, losing some ground only against the aussie and the pound.

Following an uneventful final week of 2023, when investors and fund managers were probably busy closing their books, the Fed’s future course of action could return as a front-page topic on this week’s agenda. On Thursday, the minutes of the December gathering are due to be released, while on Friday, nonfarm payrolls are likely to take center stage.

When they last met, Fed officials revised down their interest rate projections, with Chair Powell noting that higher rates “is not the base case anymore.” The dovish outcome combined with the slowdown in the core PCE index the following week prompted investors to currently assign a nearly 95% probability for a quarter-point cut to be delivered in March, while expecting a total of 155bps worth of reductions by the end of the year.

Ergo, should the minutes reveal that rate cuts were a main topic in policymakers’ discussion, and should Friday’s jobs data point to some further softness of the labor market, traders may be tempted to add to their rate cut bets, something that may halt the dollar’s recovery and signal the resumption of its prevailing downtrend.

Eurozone inflation data to impact ECB expectations

The Fed’s dovish view contrasted with the stance of the ECB and the BoE, which pushed against rate reductions by reiterating their “higher for longer” mantra. That said, investors are still expecting 160bps of cuts by the ECB this year and 144bps worth of reductions by the BoE.

The market’s belief regarding the ECB will be tested on Friday, ahead of the US nonfarm payrolls, when the Eurozone’s preliminary CPI rates for December will be published. Although a modest slowdown is expected in underlying price pressures, headline inflation is anticipated to have rebounded, which could add fuel to the euro’s engines as traders scale back some basis points worth of interest rate cuts.

Yen slides despite earthquake, gold rebounds

The yen is also on the back foot against the dollar today, failing to attract safe haven flows after a powerful earthquake hit Japan on New Year’s Day. That’s a very different market reaction compared to the one that occurred after the earthquake and tsunami that hit Japan in 2011. Back then, the Japanese currency rallied amid repatriating flows and a tumbling stock market.

Perhaps the safe haven of choice this time was gold, which rebounded even as the US dollar and Treasury yields were on the rise. With central banks around the globe expected to cut interest rates this year, the opportunity cost for holding the precious metal is probably expected to substantially decline, suggesting that there is scope for more advances in the near future. A cocktail of dovish Fed minutes and a soft employment report this week could further fuel the metal’s uptrend.

Asian stocks trade mixed, oil gains on supply concerns

Wall Street closed the last trading day of 2023 in the red, perhaps as portfolio and fund managers closed their books for the year, with all three of the main indices posting double-digit growth for the whole year.

Today, Asian indices started 2024 mixed, with China’s Shanghai Composite losing some ground despite China’s Caixin PMI showing that factory activity expanded at a quicker-than-expected pace in December. Perhaps investors paid more attention to the official PMI data, released on Sunday, which painted a different picture. The official PMI fell to 49.0 in December from 49.4, signaling contraction for the third straight month, ringing the stimulus alarm bells for Chinese authorities.

Moving to the energy sphere, oil prices jumped today, as on Sunday, US helicopters repelled an attack by Iran-backed Houthi militants on a Maersk container vessel in the Red Sea, sparking fears of potential supply disruptions. That said, with demand expected to remain subdued due to a global economic slowdown and US crude production at record levels, the recovery may be destined to remain limited and short lived.