Dull Jobs Data Dims Dollar's Dazzle, Post FOMC Minutes

(RTTNews) - Currency market movements during the first week of 2023 were greatly shaped by the hawkish revelations in the minutes of the Federal Open Market Committee held in December and the economic data updates from the U.S. and elsewhere.

The FOMC minutes released on Wednesday not only showed that rate cuts were unlikely in 2023 but also that it would be necessary to put up with higher interest rates for longer than expected. The JOLTS data release on Wednesday showed a higher-than-expected number of job openings, implying a strong labor market. This, as well as the ISM manufacturing PMI for December which was only slightly below forecast, lent support to the Dollar.

The monthly labor market update on Friday which showed Average Hourly earnings rising only by 4.6% versus expectations of 5% triggered a reassessment of the Fed's moves and speculation on the headroom available for the Fed to pursue its aggressive stance. The non-farm payrolls growing by 223 thousand, versus the addition of 200 thousand that markets were expecting, could not suffice to strengthen the greenback, as it was the least growth since December of 2020.

The more-than-expected decline in Factory orders as well as unexpected drop in ISM Services PMI for the first time since May 2020, also exacerbated the Dollar's retreat. Factory orders declined by 1.8 percent in November versus expectations of a 0.8 percent decline. The ISM Services PMI dropped to 49.6 in December, below market forecasts of 55, and November's reading of 56.5.

The Dollar Index (DXY), which measures the Dollar's strength against a basket of six currencies strengthened only marginally in the past week. DXY which had finished the previous week ended December 30 at 103.52 dropped to a weekly low of 103.47 by Tuesday. However, the fear of a hawkish Fed, as revealed by the FOMC minutes lifted the Dollar Index to as much as 105.63 by Friday, before weak economic data from the U.S. dragged it down, closing the week at 103.88 on Friday, January 6.

The Euro weakened against the Dollar in the past week from $1.0702 on December 30, to $1.0644 on January 6. The EURUSD pair remained firm near 1.07 levels at the beginning of the week, but dropped to as low as 1.0483 by Friday, coinciding with the Fed-led Dollar rally. The decline in the inflation readings in Germany and France as well as the broader euro Area, that suggested the European Central Bank could pause its monetary policy tightening earlier than expected, also impacted sentiment.

The British Pound edged lower in the first week of 2023 from $1.2097 on December 30 to $1.2092 on January 6. The pair's weekly high of 1.2101 and weekly low of 1.1840 were both recorded on Friday, January 6. In addition to Fed-fears, the Final S&P Global/CIPS Services PMI readings for December being revised lower to the contraction territory also impacted sentiment.

The USD/JPY pair which opened the week at 131.13, finished Friday's trading at 132.07. The pair ranged between 134.79 and 129.51 in the past week.

The AUD/USD pair which opened the past week at 0.6814 touched a high of 0.6888 and a low of 0.6716 before finishing Friday's trade higher at 0.6875.

Market sentiment is currently tethered to the expectations regarding U.S.CPI data release due on Thursday. Headline inflation is seen falling to 6.5 percent from 7.1 percent earlier, whereas core inflation is seen dropping to 5.7 percent from 6 percent earlier. The Fed chair Jerome Powell's speech on Tuesday would also be keenly watched for monetary policy cues.

The DXY is currently at 103.47, down 0.40 percent on an overnight basis. The EUR/USD has gained 0.60 percent overnight to 1.0708 whereas the GBPUSD pair is at 1.2166, up 0.61 percent in the current session. The USD/JPY pair is currently at 131.97. The AUDUSD pair has increased to 0.6933.