Article by: ETO Markets
Forex markets are experiencing a second consecutive day of losses, extending the softer start to the year. Traders are eagerly awaiting the release of minutes from the December FOMC meeting.
Considering the impressive finish to 2023, it's not surprising to see some profit-taking at this point. Much has already been factored in, and significant data on the US labor market is expected later in the week.
The FOMC minutes, due later today, may add some excitement, although it's unclear how much new information they'll provide. The dot plot has already given us the essential details, and the minutes are likely to provide additional context rather than change the overall story.
Recent JOLTS data indicates a continued weakening trend in the labor market, with job openings dropping to 8.79 million in November. While this is still above pre-Covid levels, it supports the notion that the labor market, despite showing some weaknesses, remains robust. The data is moving in the right direction and aligns with the Fed's goals of price stability and a gentle economic landing.
The ISM manufacturing PMI met expectations, edging up to 47.4 but still below the 50 level indicating growth. Of particular interest is the ISM prices component, suggesting potential further disinflationary pressures from the manufacturing sector.
EUR/USD stayed on a downward trend for the fourth day in a row on Wednesday, dipping below 1.0900 briefly due to a strong surge in the US dollar.
The USD Index (DXY) rose to fresh three-week highs around 102.70/75, driven by ongoing weakness in risk-related assets and increasing US yields. Despite a positive job report in Germany, the euro struggled against the dollar's strength. The US labor market showed signs of cooling with lower-than-expected JOLTs Job Openings in November. However, hopes for a smooth US economic slowdown were boosted by a better-than-expected ISM Manufacturing PMI of 47.4 in December.
No significant updates came from the FOMC Minutes release of the December meeting, where members hinted that interest rates might have peaked for the current economic cycle. Projections suggested a lower rate by 2024, and some committee members proposed keeping the benchmark policy rate unchanged for a more extended period than initially anticipated.
Comments from Richmond Fed T. Barkin, who supported a soft landing for the US economy and didn't rule out additional interest rate hikes, contributed to the strong performance of the US dollar midweek.
The AUD/USD faced losses for the fourth day in a row on Wednesday, dropping briefly to around 0.6700 before a slight recovery by the end of the NA session. The bounce in the US dollar, driven by factors like higher yields, a strong ISM Manufacturing PMI, and hawkish comments from Richmond Fed T. Barkin, contributed to the Aussie's decline.
Despite the US labor market easing, the greenback remained strong. On Thursday, with no major data releases in Australia, traders are keeping an eye on China's Caixin Services PMI and Composite PMI for December, following the positive manufacturing data earlier in the week.
Looking ahead, the Aussie dollar's performance will likely be influenced by factors such as the Federal Reserve's stance on interest rate cuts, potential rate hikes mentioned by Barkin, and the Chinese economy's recovery post-pandemic. The Reserve Bank of Australia (RBA) has paused for now.
On Thursday, attention will also be on US data, including the ADP report on private sector job creation and the weekly Initial Jobless Claims for the week ending December 23. These factors will play a role in shaping the AUD's movement in the coming weeks.
