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Forex Today: Dollar struggles ahead of an unusual week

Holiday-thinned trading, a shortened week, and a light economic calendar point to abnormal price action in the last days of 2023. Will Santa's rally continue? Will the US Dollar remain under pressure?

Here is what you need to know for next week: 

The economic calendar is light next week. Adding to this, holiday-thinned trading could favor limited price action while at the same time encouraging false breakouts. Most trading platforms won't be functional on Monday.

It was another positive week for equity prices. The Dow Jones reached all-time highs, while US Treasury yields moved lower. The 10-year settled around 3.90%, the lowest since July. Will Santa stay on Wall Street next week? 

The US Dollar Index (DXY) lost ground for the second week in a row, falling to monthly lows, below 102.00. It continues to move with a bearish bias, on the back of risk appetite and lower yields. Market repricing expectations from the Federal Reserve (Fed) in 2024 keep the Greenback under pressure.

This week's key number was the Core Personal Consumption Expenditure (Core PCE), which rose 0.2% in November, below the expected 0.3%, and 3.2% from a year ago. The headline index actually declined 0.1% in November, marking the first negative reading since 2020. The data adds to evidence that inflation is moving toward the Fed's 2% target. Data from the US next week includes home prices (Tuesday), Jobless Claims (Thursday), and the Chicago PMI (Friday).

The EUR/USD rose above 1.1000, and next week's challenge will be to remain above that area. The pair posted the highest weekly close in five months. The crucial report will be Spain's preliminary Consumer Price Index (CPI) for December on Friday.

The GBP/USD posted modest weekly gains, facing difficulty holding above 1.2700. Despite posting gains versus the US Dollar, the Pound was affected by UK inflation data, which came in softer than expected. EUR/GBP rose from 0.8575 to 0.8660, retaking the 20-week Simple Moving Average. No relevant data from the UK is due next week.

The Japanese Yen was the worst performer among majors during the week, following the Bank of Japan (BoJ) monetary policy meeting. USD/JPY posted minor gains; however, it finished far from the weekly peak around 142.50, showing that prevailing risks are to the downside. On Wednesday, BoJ will release the Summary of Opinion of the latest monetary policy meeting. Data due from the country includes retail trade data and industrial production. Japanese economic figures could start having more relevance considering the expectations about a potential exit from BoJ's negative interest rate policy.

No relevant economic reports are due from Canada, Australia, and New Zealand. AUD/USD and NZD/USD posted important gains for the second week in a row and the highest close since July. Price action is expected to continue to be driven exclusively by USD dynamics.

The USD/CAD tumbled, falling below 1.3300, marking the lowest weekly close since August. The Canadian Dollar lagged behind the AUD and the NZD, amid risk appetite and subdued crude oil prices.

Gold posted the second-highest weekly close on record. XAU/USD hovers around $2,050 and the trend is up. The main risk for the yellow metal could come from a repricing of Fed easing expectations. A rebound in US yields could trigger a sharp correction in Gold. 

Author

Matías Salord

Matías started in financial markets in 2008, after graduating in Economics. He was trained in chart analysis and then became an educator. He also studied Journalism. He started writing analyses for specialized websites before joining FXStreet.

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