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The US currency left a complicated period behind. The reserve currency turned sour in December despite hawkish signals from the Federal Reserve. Now it seems the US dollar is responding how it should have to. So, it has perked up on the first trading day of the year. Demand for the US dollar sets the stage for three Fed's rate hikes this year. On Monday, a sharp increase in US Treasury yields made the greenback rebound. Yields of the benchmark 10-year Treasuries climbed above 1.6%, the level unseen in more than a month.
A series of macroeconomic data which is due later this week should boost demand for the US dollar. Investors are anticipating the hawkish minutes of the FOMC policy meeting as well as strong US nonfarm payrolls. The actual data is likely to beat estimates amid a seasonal surge in employment around ahead of Christmas, in particular in the retail sector.
Today, ISM manufacturing PMI will hardly feed the USD bullish momentum because business activity in Philadelphia seriously slowed down its expansion in December.
Meanwhile, the US dollar index is trading at nearly 96.50, the highest level of 2021 logged in November. Most experts are betting on the greenback's strength in 2022. Its index is expected to surpass the mark of 100.00, aiming to test the next obstacle at 105.00.
Importantly, the US dollar gained the most against the Japanese yen. USD/JPY rose to a 5-year high with prospects of a further advance. What lies behind this breakthrough?
Rates of Omicron cases are going up, updating previous records. Remarkably, such news is of little importance to market sentiment. According to research by the Stratens Serum institute, the risk of hospitalization with the Omicron variant is twice lower than with the Delta variant. Besides, the Omicron variant is expected to make limited damage to the global economy. So, the threat of new lockdowns is rather low. The authorities in most countries could prefer the strategy of building the collective immunity, thus allowing lots of people to go through the disease. Under such conditions, Omicron might become the final stage in the pandemic.
Investors see Omicron as potentially less disruptive to the global economy than previous variants. Amid the risk-on mood, investors are exiting safe haven assets, shifting focus towards risky ones. As a result, the yen is losing ground.
Experts at Credit Agricole think that the global economy will click into gear in 2022. This will assure major central banks, including the Federal Reserve, to tighten monetary policy after the cycle of ultra-low interest rates. Currency analysts predict that the yen could weaken to 118.00 against the US dollar by the end of 2022.
This week, it would be interesting to watch the Canadian dollar. Like its American rival, the loonie will depend on the employment data for December, IVEY PMI, and trade balance.
The report on Canada's labor market will hardly repeat the previous success despite growing oil prices. Besides, the Federal Reserve might raise interest rates earlier than the Bank of Canada. Such circumstances will put pressure on the Canadian dollar. Yesterday USD/CAD climbed sharply amid the broad-based strength of the greenback. The currency pair is likely to extend its climb indefinitely.
The euro and the pound sterling are showing the strongest resilience to the greenback. Things are clear about the sterling. The Bank of England caught investors off-guard with the unexpected rate hike in December. The UK is not planning to impose lockdown. The authorities consider Omicron less aggressive than the previous strain.
The euro is also showing remarkable resilience despite the ECB dovish stance and downbeat macroeconomic data for the EU. In theory, EUR/USD is expected to trade below 1.1200. In practice, the currency pair is actually trading above 1.1200.
What to expect for the euro in the short term? Recently, analysts predicted that the euro would fall to 1.1000. Is the forecast realistic? Judging by the current dynamic of EUR/USD, the pair is a hard nut to crack.
Anyway, the euro might give in to the firm US dollar. This week, the greenback is likely to show the strongest performance on Forex. Even though the US currency commonly trades lower in January, this month could be an exception.
If the US dollar receives support from rising yields of US Treasuries, the euro will have to retreat and acknowledge the greenback's uptrend.
After yesterday's turbulent session, EUR/USD tried to recover, but failed to settle above 1.1300. Meanwhile, this level serves as dynamic resistance. As long as this level does not turn into support, the sellers will hold the upper hand.
Support is seen at 1.1270 and 1.1240. In mid-December, the currency pair slumped by 100 pips to 1.1240 which acted as support back then. So, this level is of major importance. Resistance is defined at 1.1300, 1.1320, and 1.1340.
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