Dollar rally may soften with FX market normalization: ING

Monday saw the U.S. dollar maintaining its upward trajectory, continuing the trend from the holiday season and defying traditional seasonal patterns.

Despite a brief upswing in U.S. Treasuries at the end of December, the dollar's strength persisted into the new year, with European currencies experiencing downward pressure.

As normal market conditions resume this week and foreign exchange liquidity increases, there might be a slight easing of the dollar's momentum, according to analysts at ING.

Technical indicators suggest that the recent rally may be overstretched, but the upcoming inauguration of Donald Trump is likely to keep investors leaning towards the safety of dollar long positions.

Historically, January and February have been strong months for the dollar, which may further support its position.

The focus is expected to shift back to economic data this week. Following the hawkish stance of the December Federal Open Market Committee (FOMC) meeting, the threshold for data to negatively impact the dollar has been raised. Market pricing indicates a potential rate cut in March, with 12 basis points (bp) already factored in, 17bp for May, and 25bp for June.

Comments from FOMC members Mary Daly and Adriana Kugler, expressing concerns about inflation, have added to the hawkish narrative and could provide a bullish backdrop for the dollar if the Fed re-emphasizes its inflation mandate.

The U.S. will release December jobs data on Friday, with projections suggesting a payroll increase of 140,000 and an unemployment rate holding steady at 4.2%, aligning closely with consensus estimates. This anticipated outcome would align with the Federal Reserve's expectations of a gradual cooling in the job market, which influenced its decision to project only two rate cuts in 2025.

This week will also feature the release of the JOLTS job openings, the ISM service index, and the minutes from the FOMC meeting.

Despite technical signs pointing towards a potential correction or slowdown in the dollar's rally, buying interest on dips is expected to remain strong, ING said. The target of 110.0 for the Dollar Index (DXY) is still considered achievable in the coming weeks, reflecting the unchanged tactical stance on the currency from the previous week.

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Source: Investing.com