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USD starts 2023 on the back foot

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Analysts had suggested that the US dollar would continue its recent weakness with more downside and short traders have not been disappointed. That being said, the dollar is holding up against the euro.

Jeremy Naylor | Writer, London | Publication date: Tuesday 03 January 2023 


(Video Transcript)

Currency markets subdued
Trading on the currency markets has been fairly subdued on this first main day of trade for 2023, as traders are gearing up for some important data to be released later on in this week.

Let's start tomorrow with the Federal Open Market Committee (FOMC) minutes. At the conclusion of the last Federal Reserve (Fed) meeting mid-December, Fed chairman Jerome Powell announced that 50-basis point increase of Fed funds rate of a range between four-and-a-quarter and four-and-a-half percent, now at the highest in 15 years. This was a conclusion of a year that saw the US Federal Reserve hiking by a cumulative 425 basis points.

Now investors are also expecting some employment data out this week. On Thursday, the ADP employment change, that's the private payrolls release and weekly jobless claims, and December non-farm payrolls coming on Friday.

A quick snapshot of what we're expecting there: early expectations point to 200,000 job creations last month. The unemployment rate is set to remain at 3.7% and average hourly earnings expected to rise by a margin of 5% year-on-year.

US dollar basket
I want to show you this chart. This is the dollar basket, the dollar trading against the whole basket of G10 currencies. And you can see we continue to challenge this line of support at 10307.

We saw the return of trade today, again testing that area at 10307, and if we do get a break of that within down to levels not seen since the 9th of June, and then the next line of support to watch out for is 10110.

How do you trade this? Well, it's around the euro/dollar trade. It's the second day in a row of losses for the euro against the US dollar, despite the weakening of the US dollar down to those levels. The line of support is at 10616, which I've drawn on here, which were the highs we had back to the 27th of June. And we saw that area challenged again recently, it has been an area of interest at 10616. 10657 is what we are trading at the moment. And with the Fed minutes released tomorrow, we'll be looking for, I guess, a continuation of the recent trend that we've had with a stronger euro against that weaker US dollar.

If you're strong on this trade, if you’re long at 10656, your stop would go below the 106 level.

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