- Dollar resumes slide ahead of key US data for January
- Investors are still penciling in two 25bps Fed cuts in 2026
- There are downside risks to the NFP and upside risks to the CPI inflation
- NFP due out on Wednesday (13:30 GMT), CPI on Friday (13:30 GMT)
Dollar Gives Back Portion of Last Week’s Gains
The resumed its slide on Friday and entered the new week on the back foot, with traders now locking their gaze on Wednesday’s rescheduled and Friday’s data, both for January.
Last week, the surprised to the upside, helping the US dollar extend the recovery triggered by the nomination of Kevin Warsh as the new Fed Chair. However, the private employment report revealed less-than-expected jobs growth for January, which combined with an unchanged ISM services PMI allowed investors to maintain bets of two quarter-point by the Fed this year.
Indeed, on Friday, San Francisco Fed President Mary Daly said that one or two more rate cuts may be needed to counteract the weakness in the labor market, with investors now assigning 55bps worth of reductions by December. She added that she supported the last decision of keeping interest rates unchanged, but she is seeing a case for “going ahead and taking a little more off.”
NFP Expected To Accelerate, but Downside Risks Loom
Her remarks somewhat contrast with Powell’s view that the downside risks to the labor market are diminishing, and place extra emphasis on the January jobs data, which was rescheduled due to last week’s partial government shutdown. Expectations are for the US economy to have added 70k jobs after adding 50k in December, and for the unemployment rate to have held steady at 4.4%.
The forecast for the private payrolls is also 70k at a time when manufacturing payrolls are expected to have fallen 5k. This means that government payrolls may have been very low, and that the headline print may be mostly driven by the private payrolls figure. Nonetheless, bearing in mind that the ADP report revealed much softer jobs growth for the private sector, the risks surrounding the official report may be tilted to the downside. The slide in the employment subcomponent of the and the tumble in to their lowest since September 2020 are adding extra credence to that view.
A report confounding the idea that the downside risks to the labor market are diminishing could prompt some investors to start flirting with the idea of a third Fed cut this year and thereby add more pressure on the greenback.
Will the Inflation Data Point to Further Stickiness?
Nevertheless, whether the slide will be sustained or not will likely depend on Friday’s CPI data. The held steady at 2.7% y/y in December, staying remarkably above the Fed’s objective of 2%, and it is expected to have pulled back to 2.5% in January. That said, the prices subindices of both the ISM manufacturing and services PMIs pointed to accelerating prices in January, which poses upside risks.
Thus, should the CPI data reveal further stickiness in consumer prices, the US dollar is very likely to reverse and recover at least a portion of any NFP-related losses.
Euro/Dollar Returns Above Key Obstacle
From a technical perspective, rebounded and returned above the key resistance (now turned into support zone) of 1.1810 and a disappointing NFP report could encourage advances and even a break of the 1.1920 zone. If that zone is breached, the bulls may feel confident to climb all the way up to the peak of January 27 at 1.2082.
On the downside, a decisive dip below the 1.1740 zone, which currently coincides with the 50-day exponential moving average (EMA), could dismiss the bullish case and perhaps allow declines towards the 1.1575 territory, marked by the low of January 19.
