Dollar index up in first trading day of 2024, markets eye data releases 

The first trading day of 2024 saw a rise in the dollar, with focus shifting to upcoming U.S. jobs data and European inflation figures. These data points are anticipated to offer insights into central banks' potential next moves. 

The dollar index (DXY), which measures the strength of the U.S. currency against six counterparts, stood at 101.68, marking a 0.34% increase on the day. The index saw a 2% overall decline in 2023, ending a two-year streak of gains as investors weighed the possibility of the Federal Reserve (Fed) — the U.S. central bank — cutting interest rates in 2024. 

The euro faced a 0.43% dip as traders absorbed data indicating a contraction in eurozone factory activity for the 18th consecutive month in December. At the time of writing, the EURUSD exchange rate was last seen at $1.10. 

The session also saw the Japanese yen struggling, with the dollar strengthening by 0.59% to 141.70 yen. Despite the retraction, the majority of analysts have predicted the Japanese currency to rebound in 2024 as the Bank of Japan is expected to normalise its monetary policy and step away from its ultra-loose approach.  

Fed minutes: Thursday release may impact DXY 

This week is marked by a slew of economic data releases, including European inflation figures and U.S. data covering job openings and non-farm payrolls. These releases are expected to shape market expectations regarding potential monetary policy moves from both the Federal Reserve and the European Central Bank. 

Market indicators currently suggest an 86% likelihood of interest rate cuts from the Fed beginning in March, according to the CME FedWatch tool, with expectations of over 150 basis points of easing throughout the year. 

Further insight into the central bankers' thinking may come following the release of minutes from the last Fed meeting in December, scheduled for Thursday. 

Nicholas Chia, macro strategist at Standard Chartered, told the Reuters news agency that the U.S. jobs report was also one to watch:

"The positive sentiment from end-2023 may roll over into this week as all eyes turn to the U.S. jobs report on Friday”. 

Neil Wilson, Markets.com’s Chief Market Analyst, gave a preview of the December payrolls report in a week-ahead outlook on December 29. The report will likely influence the Fed’s thinking in determining when to cut interest rates: 

“The December payrolls report comes as labour market data has generally underscored the soft-landing narrative favoured by most investors at the moment. November’s report showed unemployment fell to 3.7% from 3.9%, whilst the headline payroll number was 199k vs 150k in the prior month. December’s number can be noisy and tricky however due to seasonal factors. The key thing for markets is whether it’s showing enough of a cooling to justify the Fed cutting rates early next year or will it hold up and sustain inflation for a bit longer?” 

That sentiment was boosting commodities and stocks on Tuesday and rippling across into currencies. 

"2024 starts in a positive mood in FX," Kenneth Broux, senior strategist in FX and rates at Societe Generale, told Reuters, pointing to commodity and stocks-associated gains in the Australian dollar (at one point up 0.22% at $0.6825, but later retreating), the Norwegian krona (slightly firmer at 10.16 per dollar) and, in emerging markets, the Mexican peso. 

Pound sterling also declined against the dollar, with the GBP to USD rate declining by 0.45% on the day to $1.2670. Despite achieving a notable 5% gain last year, marking its most robust performance since 2017, British pound forecasts last showed limited optimism due to economic weakening and election uncertainties. 

The majority of analysts have projected potential dollar weakness in 2024, which is conditional on the depth and speed of the Fed’s interest rate cuts. The Federal Reserve’s recently revealed “dot plot” showed U.S. policymakers are anticipating 75 basis points (bps) of cuts in the current year. Wall Street investment banks are forecasting deeper reductions, with forecasts ranging from as much as 275 bps from UBS to Goldman Sachs’ more conservative estimate of 50 bps.