The Dollar’s Strength Continues in the Runup to the NFP

Forex majors have generally started the year slowly with trends from the end of 2024 mostly continuing. Now the focus is likely to shift somewhat more onto politics as Donald Trump is inaugurated as president later this month. This article summarises recent news and data affecting the dollar then looks briefly at the charts of EURUSD and USDJPY.

Nearly all senior members of the Federal Reserve (‘the Fed’) consider the risk greater for inflation to increase rather than decrease. Since headline inflation increased for two months running late last year, this might continue since there’s no immediate sign that upward pressure will decline:

Various parts of the USA have experienced a colder winter than usual, boosting demand for natural gas and so increased its retail price, which has been an important contributor to higher inflation in recent months. It seems clear that there’ll be at least a slight increase in December’s figure, due on 15 January.

The main challenge for the Fed now is to try to preempt the impact of new tariffs proposed by the incoming Republican government. So far, the Fed’s approach seems to be cautious. Policymakers have also highlighted the generally strong job market:

Unemployment rose to 4.2% in November as widely expected but there’s no indication currently that the rising trend from the second quarter of last year will continue soon. October’s NFP of only 36,000 seems to have been a ‘blip’ given that November’s figure of around 227,000 was much higher than the consensus. However, traders should be aware of the possibility that this could be revised.

10 January’s NFP is a critically important release which might give more direction to the dollar. Expectations are somewhat mixed for unemployment, either staying at 4.2% or rising slightly to 4.3%, while the consensus for the NFP itself is around 160,000. A higher NFP might confirm higher inflation.

Recent reports suggest that Donald Trump is considering declaring a national economic emergency, which would allow him to introduce large new tariffs more easily. This isn’t a new narrative: since November’s election, most participants have expected significant new tariffs to come into force in early 2025. The actual impact of these remains to be seen, but since tariffs typically increase prices for products they effect, it stands to reason that inflation will continue rising.

Euro-dollar Hesitates Around $1.03

Euro-dollar’s long downtrend has paused for breath in January so far as participants digest possibilities for central banks this year. Two cuts by the Fed seem to be more-or-less confirmed for now but there’s still some intrigue as to how low the European Central Bank (‘the ECB’) might go in 2025. Recent expectations suggest three cuts with a chance of about 70% for a fourth at the end of the year. Among major currencies, the euro probably has the most to lose from the introduction of potentially large American tariffs.

2 January’s push below $1.03 was retraced fairly quickly and the price has been reluctant to push below there again since. Based on the weekly chart, this area doesn’t seem like an especially strong support, so unless there’s a significant change in fundamentals, the downtrend might continue. Parity is an obvious support but it would probably take some time for the price to move that low. $1.02 or maybe $1.01 seem more realistic as short to medium-term targets for new sellers.

It’s difficult to see much upside currently for euro-dollar beyond $1.045. The 50 SMA from Bands could confirm this area as a resistance. With no clear signal from volume or the slow stochastic, the next movement depends mainly on the results of the NFP and next week’s American inflation.

Dollar-yen Hovers Around Six-month Highs

As with euro-dollar, the main fundamental factor recently for dollar-yen has been monetary policy. The Bank of Japan’s recent moderate hawkishness seems more questionable now with real annual wages having fallen recently while the Fed seems to be confirmed to cut only twice this year.

The break above ¥158 in the last few days hasn’t led to a clear breakout but a small retracement lower. In the context of the slow stochastic having signalled overbought consistently for nearly a month now, that might suggest that consolidation or possibly losses are more likely than another immediate movement upward. ATR has been extremely low recently, which could also signal a change of direction.

Within the wide channel between ¥161 and ¥150 there’s considerable scope for movement around important upcoming data from the USA. A more positive NFP would usually suggest higher inflation also, but there are exceptions to this.

This article was submitted by Michael Stark, an analyst at ExnessExness.

The opinions in this article are personal to the writer. They do not reflect those of Exness or FX Empire.