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The dollar kicks off the year with two failed rebound attempts (Daily analysis 9.01.2023)

9 Jan 2023 9:46|Bartosz Sawicki

In the first week of 2023, the dollar exchange rate recorded two failed rebound attempts. The EUR/USD could not break 1.05, and the euro-dollar exchange rate bounced towards 1.07 and the December highs. This was in response to US labour market data, which indicated a decline in the unemployment rate and decelerating wage pressures.

Exchange rates at the beginning of 2023: dollar exchange rate after failed attempts to rebound, EUR/USD exchange rate at 1.07; source: Conotoxia

The euro: EUR was hurt by inflation, but helped by fading threat of crisis

The beginning of a year or quarter is often a time when investors look for a new theme for quotations and strategies. In the past few days, the impulses and information coming from the Polish and the global economy were encouraging and favourable for the PLN. Firstly, in Poland and the eurozone, inflation data for December came in below expectations. Secondly, hopes are beginning to strengthen that the global economy may be able to avoid a deeper recession, and the likelihood of a so-called soft landing is growing.

As far as the euro area is concerned, these are due to the revision of the sentiment indexes in services and industry. The economic picture painted by these is less pessimistic than a few months ago. The weather also continues to help. The mild winter keeps gas storage facilities filled to the brim and brings crude contract prices with a monthly delivery to the lowest since mid-2021. The lower and faster peak in inflation (its growth rate has slowed from 10.1 to 9.2% y/y) is positive for economic growth and consumption, but at the same time, hurts the euro, as it calls into question the high bar of expectations for the ECB's interest rate target. The valuation of the total scale of hikes has already evaporated 20 basis points of tightening this year.

The US dollar: the US labour market strong, but wages hurt the USD

Investors are, as a result, somewhat torn apart. There is a tug-of-war and a wait-and-see attitude going on, which is causing the EUR/USD to be choppy and lacking a clear trend. The dollar has collapsed from its highs in the past months, and the euro has retreated from the abyss. After these strong reshuffles, the market may want to make sure of the direction in which the global economy will go. The USD situation is also not clear.

For example, Friday's US labour market report indicated a decent pace of non-farm job creation. Employment change came in at 223,000, which was about halfway between forecasts (around 200,000) and the previous month's data. At the same time, a drop in the unemployment rate to 3.6 as opposed to the expected 3.5% was recorded, with a minimal rise in this index. This was not enough to derive a positive outlook for the dollar.

On the contrary, with wage growth falling to 4.6% year-on-year and the November data revised downwards, the US dollar depreciated at the end of the week, bonds rose sharply, and Wall Street indexes soared, with the S&P 500 and the technology-oriented NASDAQ rising by more than 2% on Friday. At the moment, there is more support for an unfavourable defensive dollar investment environment, but the sustainability of the recent move may be put to the test in the form of Thursday's US inflation reading, which will be this week's market nail-biter. CPI growth is expected to slow from 7.1 to 6.5% y/y, and especially after the low data from the eurozone, a potential slower extinction of price pressures could be an opportunity for the dollar to rebound.

9 Jan 2023 9:46|Bartosz Sawicki

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

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