Week Ahead: Dollar to falter at onset of 2023?

As we make fresh resolutions (especially those that pertain to trading/investing), here's a head start on the potential opportunities ahead, starting with these key economic events and data releases in the first week of the new year:
 

Monday, January 2

• EUR: Eurozone December manufacturing PMI (final)
• US, UK markets closed

Tuesday, January 3

• CNH: China December Caixin manufacturing PMI
• EUR: Germany December unemployment and inflation (CPI)
• GBP: UK December manufacturing PMI (final)
• CAD: Canada December manufacturing PMI
• USD: US December manufacturing PMI (final)

Wednesday, January 4

• EUR: Eurozone December services PMI (final)
• USD: FOMC meeting minutes, US December ISM manufacturing

Thursday, January 5

• AUD: Australia December composite and services PMIs (final)
• CNH: China December Caixin services PMI
• JPY: Japan December consumer confidence
• EUR: Eurozone November PPI\
• USD: US weekly initial jobless claims

Friday, January 6

• EUR: Germany November factory orders
• EUR: Eurozone December inflation, consumer confidence (final); November retail sales
• CAD: Canada December employment data, jobless rate
• USD: US December nonfarm payrolls report

 

As is the case on the first Friday of every month, markets will be primed to react to the monthly US jobs report.

At the time of writing, markets are forecasting an NFP (nonfarm payrolls) headline figure of 200,000 US jobs added in December, while the unemployment rate stays at 3.7%.

• If that 200k estimate proves true, that would be the fewest number of jobs added to the US labour market since December 2019.
   
• At 3.7%, that would mean that unemployment is still stubbornly around pre-pandemic lows, despite the Fed already having triggered many a supersized rate hike with hopes of incurring some demand destruction to rein in inflationary pressures.

 

Dollar to react to what US jobs market portends for Fed rate hikes

• Should the US labour market continue to show signs of resilience, either by way of a higher-than-expected headline NFP figure (>200k) or a lower-than-expected unemployment rate (<3.7%), that may translate into a rebound for the US Dollar.

Relief for dollar bulls would be based on the notion that the Fed has to send its benchmark rates even higher in 2023 to cause more demand destruction and quell US inflation.
 

• However, if we are shown signs of widening cracks in the US jobs market, either by way of a lower-than-200k headline NFP figure or a higher-than-3.7% unemployment rate, that may extend the Dollar’s declines from Q4 2022.

 

Also, pay attention to the latest minutes from the Fed’s December policy meeting, to be released on Thursday.

If there are signs that voting members on the FOMC are losing their collective zeal for sending US interest rates much higher in 2023, then dollar bears (those hoping the US dollar will fall) could pounce on such dovish signals to send the greenback lower.

 

Notice how this equally-weighted USD Index (as opposed to the benchmark DXY) has been trading around two key Fibonacci levels for all of December.

The longer it consolidates around this region, the more explosive the potential breakout from all that pent-up indecision.

 

USD Index: Immediate support and resistance levels

• Support: 1.170 region (23.6% Fibonacci line from the USD Index’s 2022 peak-to-trough retracement)
   
• Resistance: 1.190 (200-day simple moving average)
   
• Resistance: 1.19467 (50% retracement) – 1.19754 (previous cycle high)

 

To be fair to dollar bulls, markets are positioned for more US dollar gains against most of its G10 peers, except against the Japanese Yen, over the next one week.

 

Still, from a fundamental perspective, a dollar rebound may well require further proof that the Federal Reserve can afford to send US interest rates past 5% (from the current 4.5%) as 2023 rolls along, starting with next week’s US jobs report and the incoming FOMC meeting minutes.

Otherwise, markets are likely to continue expecting this Fed pivot: that the Fed is much closer to being done with rate hikes are could actually lower US rates to offset a potential recession later in 2023.

Rising expectations for an eventual "Fed pivot" are then likely to drag the US dollar even lower.

 

Week Ahead Nonfarm Payrolls US jobs report NFP Fed rate hikes FOMC minutes US Dollar