U.S. Dollar Gains Traction Amidst Economic Data Anticipation

In early European trade on Tuesday, the U.S. dollar exhibited a slight upward trend, setting the stage for a week dominated by key economic indicators that are expected to provide insights into the Federal Reserve’s future policy decisions.

As of 04:00 ET (09:00 GMT), the US Dollar Index, tracking the dollar against a basket of six other currencies, showed a 0.1% rise at 101.125. This modest recovery follows a five-month low, with the greenback having experienced a 2% decline throughout 2023.

Payrolls Steering Dollar Sentiment

The dollar faced headwinds due to growing expectations that the Federal Reserve would initiate interest rate cuts in 2024. CME’s Fedwatch tool indicated traders pricing in over a 70% likelihood of a 25 basis point rate cut in March 2024. Leading up to the March meeting, the market anticipates a barrage of crucial economic readings.

Later on Tuesday, U.S. manufacturing PMI data is expected to reveal the sector’s continued contraction. Additionally, Thursday will witness the release of the minutes from the last Fed meeting in December. However, the spotlight remains on Friday’s nonfarm payrolls data for December, projected to show a dip to 163,000 jobs created, compared to just under 200,000 the previous month. This anticipated slowdown in the labor market is poised to influence monetary policy considerations.

Euro Retreats from Five-Month High

In European markets, EUR/USD traded 0.1% lower at 1.1031, stepping back from last week’s five-month peak of 1.1139. This follows manufacturing PMI data confirming the sector’s persistent contraction throughout the region. Despite this, the euro closed the year with a 3% gain, marking its first yearly increase since 2020.

GBP/USD rose 0.2% to 1.2751, showcasing sterling’s robust performance in 2023 with a 5% gain, its strongest since 2017. However, data released by the British Retail Consortium indicated a slight easing of U.K. food prices in December, contributing to expectations of a potential interest rate cut by the Bank of England in 2024, potentially impacting the pound.

Yen Slumps Following Japanese Earthquake

In other currency movements, USD/JPY exhibited a 0.5% increase to 141.55, despite Japanese markets being closed for a week-long holiday, following a severe earthquake in central Japan that impacted market sentiment.

USD/CNY traded 0.5% higher at 7.1346, as official purchasing managers index data from China highlighted further deterioration in manufacturing activity at the end of 2023, with little evidence of substantial recovery in economic activity, including modest growth, stagnant employment, and a lack of substantial inflation uptick.

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