Weekly Forex Review & Outlook 03-Jan-2023: Jump in the dollar this morning, sending the euro, pound, yen and others all lower

A review of last week

Calm on the forex markets in the past Christmas week was broken by a jump in the dollar this morning, sending the euro, pound, yen and others all lower.

GBP/USD, which since 22 December had trundled sideways in a channel around 1.20500, tumbled from 1.2078 to 1.1926 in just over an hour, while EUR/USD fell from 1.0655 to 1.0554 and USD/JPY moved from 129.9 to just below 131.

A boost for the dollar came from the IMF, which warned that a third of the global economy will face a recession this year with a “tougher” year than last, but with the US economy the most resilient.

Elsewhere, like the pound, the euro had also been making like a festive crab in the past fortnight, along the 1.065 mark against the greenback, with a slight rise against the dollar in the lead up to the new year.

USD/JPY has been one of the exceptions to the otherwise lethargic rule, with a large drop on 20 December from above 137 to around 131 was followed by a gradual rebound to 134.5, before sliding lower to break below 130 to reach the yen’s seven-month high overnight.

This has been driven by speculation that the Bank of Japan could start to shift away from its ultra-accommodative monetary policy stance, with a weekend report in the Nikkei newspaper that the central bank is mulling lifting its inflation forecasts.

This is fuelling expectations for a monetary shift from the BoJ that has given the yen new legs.

The 20 December boost came from a surprise policy change, with the BoJ widening the band to let long-term yields move by 50 basis points around its 0% target up from the previous 25bps.

Although policymakers insisted this was to improve the functioning of the market, rather than being an interest rate hike, and after many years of deflation the BoJ is more welcoming of inflation than its counterparts, the policy tweak is being seen by some as the start of an exit from its current strategy.

Week ahead

Although there were national holidays in the UK and many other countries on Monday, forex markets were up and running, though the economic calendar got up and running with purchasing managers’ index (PMI) data for the EU and many countries.

On Tuesday the manufacturing PMIs continue for the UK, US, Canada and others, as well as German inflation.

Things pick up on Wednesday, with the dollar being one to watch amid the release of minutes from the Federal Reserve’s December policy meeting.

USD will again be in focus at the end of the week we get the first US non-farm payrolls report of the year.

Signs of a weakening labour market as companies become more cautious in their hiring plans would be well received and could see the dollar ease lower.

The US economy is expected to have added around 200K jobs in December, compared to 263K last time, with average wage growth dropping to 5% from 5.1%

As for movement drivers for GBP, there will be Bank of England lending and money supply data on Wednesday, services PMI on Thursday, with Friday seeing Halifax house prices and construction PMIs.

For EUR, the big day is Friday, with harmonized consumer price inflation, twinned with business and consumer confidence numbers.

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