The US dollar staged a broad recovery last week, rising against most major currencies. This rebound is viewed primarily as a technical correction following its sharp January decline, which was sparked by geopolitical tensions over Greenland and the surprise nomination of the hawkish Warsh as the next Fed Chair. Despite market confidence in at least two Fed rate cuts this year, momentum indicators suggest the dollar's upward correction may still have further to go.
Key Points:
Drivers: The dollar's rise is a technical bounce from oversold conditions, triggered by the Warsh Fed nomination. Market fears of Japanese FX intervention have faded ahead of their February 8 election.
Central Banks: The ECB and BOE held steady, with the BOE sounding dovish—markets now see a 95% chance of an April cut. The RBA hiked rates last week.
Key Data Ahead: Focus is on the delayed US January jobs report and an expected softer CPI. UK Q4 GDP and Chinese inflation data are also due.
Forex Technicals: The Dollar Index hit a key retracement level (61.8%); momentum favors more upside toward 98.60. Euro and Sterling are in corrective pullbacks that may not be over.
Regional Highlights:
Japan: Yen was the weakest G10 currency; election could bolster PM Takaichi's mandate.
China: PBOC is tolerating a stronger yuan, with a suspected limit near CNY6.80.
UK: Correcting lower after a sharp rally; BoE dovish hold shifted rate cut expectations.
EM & Commodity Bloc: Mexican Peso remains a carry trade favorite. Aussie Dollar corrected despite an RBA hike.
Bottom Line: The dollar is recovering on technicals and a hawkish Fed shift, but the broader trend may hinge on upcoming US inflation/jobs data and whether the correction exhausts itself at key resistance levels.
