Forex Today: US Dollar kicks off the week on wrong footing

Here is what you need to know on Monday, January 16:

The US Dollar is seeing a negative start to a fresh week, as risk sentiment remains in a sweet spot, thus far. The US Dollar is consolidating at around 102.00 against its main rivals, having refreshed seven-month lows at 101.77 earlier in the Asian session this Monday. The Asian stock markets ex-Japan enjoyed gains, tracking a rally in Wall Street on Friday. The US S&P 500 index surpassed the key 200-Daily Moving Average (DMA) and tested the 4,000 mark on Friday after earnings reports from the US banking giants, JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc. and Wells Fargo & Co. Investors also appear unperturbed by expectations of weak economic data from China due for release on Tuesday.

The market optimism combined with hopes of slower Federal Reserve rate hikes and the renewed USD/JPY decline is weighing negatively on the American Dollar. Markets are pricing in roughly 80% odds of a 25 basis points (bps) Fed rate hike in March, with a 25 bps fully baked in at the start of the next month, following soft US inflation data last week. Meanwhile, investors shrugged off Friday’s upbeat University of Michigan (UoM) Consumer Sentiment and Inflation Expectations data amid growing dovish Fed bets.

The USD/JPY pair remains undermined by the ongoing rally in the Japanese yen ahead of the Bank of Japan (BoJ) policy announcements this week. Japanese exporters bore the brunt of a stronger Yen, as the Nikkei 225 index fell 1%. Expectations heightened that the BoJ could tweak its policy settings on Wednesday after it failed to defend its yield curve policy once again on Monday. The 10-year JGB yield rose 1 basis point to 0.510%, topping the 0.5% ceiling of the BOJ's policy band. The pair hit an eight-month low at 127.24, earlier on, before recovering toward 128.00.

AUD/USD climbed above the 0.7000 round figure for the first time since August 2022. Risk-on trading, US Dollar weakness and hawkish Reserve Bank of Australia (RBA) expectations keep the Aussie pair afloat near 0.7000. The NZD/USD pair also advanced in tandem and briefly recaptured the 0.6400 level while USD/CAD dropped to test 1.3350 after facing rejection at 1.3400 even though the WTI price failed to hold above the $80.00 mark. The US oil ignored upbeat comments from UAE Energy Minister Suhail al-Mazrouei delivered over the weekend.  

Following Friday’s negative price action, EUR/USD renewed the best levels in nine months at 1.0874 early Monday before retreating to near 1.0850. 

Risk appetite helped GBP/USD take out the key 1.2250 resistance to head as high as 1.2290. Pound Sterling bulls, however, failed to sustain at higher levels. The pair defending minor bids at around 1.2240, as of writing. Cable awaits Bank of England (BoE) Governor Andrew Bailey’s testimony on the Financial Stability Report (FSR) before the Treasury Select Committee at 15:00 GMT, especially after the UK Gross Domestic Product (GDP) unexpectedly expanded by 0.1% MoM in November.

Gold price hit fresh nine-month highs at $1,929 before pulling back sharply to $1,915 amid overbought conditions on the daily chart.

Bitcoin also took advantage of a better risk profile and broad US Dollar weakness, having tested $21,500 levels. Ethereum is trading close to the $1,600 mark, adding over 1% on the day.

It’s worth noting that the US financial markets are closed on Monday, in observance of Martin Luther King Jr. Day. Therefore, thin trading is likely to extend, which could trigger volatility and wild swings across the board.

In the week ahead, the Q4 China's GDP, BoJ policy decision, the US Retail Sales, UK inflation and Fed speeches will be closely followed.