04.01.202215:30 Forex Analysis & Reviews: DXY: Dollar dynamics and market expectations

Despite the volatility and fluctuations in the financial market, the dollar remains positive in anticipation of a series of Fed interest rate hikes. The publication of important macro statistics on the U.S. expected this week, which will be generally positive, as predicted by economists, should also support the dollar.

On Friday, the next monthly report of the U.S. Department of Labor will be released. According to which, 400,000 new jobs (outside the agricultural sector) were created in December, and the unemployment rate fell to a new low of 4.1% since March 2020, when millions of Americans were laid off amid the massive closure of businesses due to the coronavirus pandemic.

Labor market data (along with inflation and GDP data) are key for the Fed when deciding on monetary policy. According to most economists, the U.S. labor market will continue to strengthen in the coming months, despite the increase in the number of COVID-19 cases, while there is a clear shortage of workers, and the spread of the coronavirus is forcing some consumers and temporarily unemployed to stay at home.

Today, market participants will pay attention to the publication of the U.S. ISM Manufacturing PMI at 12:00 UTC, which is an important indicator of the state of the U.S. economy as a whole. A result above 50 indicates an acceleration of activity and strengthens the USD, while below 50 means negative for the U.S. dollar.

The forecast expects the indicator at 60.2 in December (versus 61.1 in November, 60.8 in October, 61.1 in September, 59.9 in August, 59.5 in July, 60.6 in June, 61.2 in May, 60.7 in April, 64.7 in March, 60.8 in February, and 58.7 in January). This is above 50 and has a relatively high value, which is likely to support the dollar. If the indicator drops below the forecast, and especially below the value of 50, the dollar may sharply weaken in the short term.

The Manufacturing PMI, calculated by IHS Markit, released yesterday, fell to 57.7 points in December from 58.3 points in November. Nevertheless, this did not prevent the DXY dollar index from noticeably rising on Monday. Values above 50 indicate an increase in activity in this important sector. At the same time, manufacturing companies noted the easing of supply tensions, which is also generally positive for this sector of the U.S. economy.

Since the end of November, the DXY dollar index futures have been trading in the range between local highs near 96.94 and local lows near 95.54, reached at the end of November. In general, the dollar retains positive dynamics and potential for further growth.

Markets are taking into account three Fed interest rate hikes this year. As you know, following the results of the meeting that ended on December 16, the Fed leaders announced an acceleration in the pace of curtailing the economic stimulus program. This will allow it to be completed by March and start raising the interest rate in the spring of 2022.

This prospect led to an increase in U.S. bond yields. Since December, the U.S. 10-year Treasury yield has increased by 22.5%, reaching 1.636% to date. As you know, the dollar almost always strengthens with an increase in government bond yields, because the increase in yields indicates continued sales of government bonds and, accordingly, it increases the demand for the dollar as the national currency of the United States.