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Dollar cautiously optimistic ahead of U.S. jobs data
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Hello everyone, today XM Forex will bring you "[XM Foreign Exchange Market www.xmtraders.commentary]: The US dollar remains cautiously optimistic before the release of US employment data". Hope this helps you! The original content is as follows:
In Asian trading on Wednesday, the U.S. dollar index continued its gains. The U.S. dollar rose against major currencies on Tuesday, but the trend was relatively moderate. The market focused on upcoming economic data to judge the outlook for U.S. monetary policy. The euro fell after European inflation data softened. Market participants are paying close attention to upcoming U.S. economic data, especially Friday's non-farm payrolls report, which predicts about 60,000 new jobs will be created in December, slightly lower than the previous month. This will provide important clues about the Fed's interest rate path.
Analysis of major currency trends
U.S. dollar: As of press time, the U.S. dollar index is hovering around 98.57, and the U.S. dollar (USD) has maintained overnight gains despite a lack of bullish confidence ahead of the dovish Federal Reserve (Fed) expectations and the release of a series of key macroeconomic indicators. On top of this, widespread bullish sentiment in global equity markets has dented demand for the safe-haven currency the US dollar, which in turn is seen as a key tailwind for the GBP/USD pair. Technically, the weekly chart of the U.S. dollar index shows that after falling below the weekly line, it did not rebound back to the upward channel as quickly as before, which means that the center of the U.S. dollar index has moved downwards. The U.S. dollar index has a high probability of getting out of the original upward channel and turning into a box shock.

Additionally, the fundamental backdrop appears to favor bullish traders, suggesting the path of least resistance for spot prices is to the upside. Technical charts show that GBP/USD appears poised to retreat, although momentum remains bullish. Buyers' failure to break above the 1.3600 mark has intensified the retracement towards 1.3500, a breach of which would pave the way for a test of key support at the 200-day simple moving average at 1.3385. Once broken, the next target will be the 100-day simple moving average at 1.3369. Conversely, if GBP/USD holds above 1.3500, bulls will need to push the pair above the 1.3580 area.

1. The U.S. Supreme Court has designated Friday as the day to release its opinion, or to rule on whether Trump's tariffs are legal.
The U.S. Supreme Court has designated Friday as the day to release its opinion, which means that the Supreme Court may rule on the same day on whether President Trump's global tariff policy is legal. The Supreme Court never says in advance which rulings are ready for release, saying only that cases that have heard arguments are likely to be released when the justices convene at 10 a.m. Washington time. Given that the tariff case has previously entered an expedited process, a ruling is likely to be issued on Friday.
2. German inflation has fallen back to the "2 era" and the inflation center may be difficult to move down
Although the price pressure in Germany slowed down more than expected in December, as service prices continue to rise sharply, inflation is unlikely to fall further in 2026, Vincent Stamer of www.xmtraders.commerzbank pointed out in a report. DecemberThe overall annual inflation rate was 1.8%, down from 2.3% in November. "The weakness in the German economy appears to be pushing inflation down," he said. However, inflation is expected to stabilize at around 2%, with service sector inflation staying at 3.5% for the third consecutive month. Stamer added that continued wage increases are likely to push up prices of mainly labor-intensive services in the www.xmtraders.coming months, suggesting that inflation is unlikely to fall significantly below the ECB's 2% target.
3. The economic fundamentals are clear: Sweden has strong growth and the Norwegian krone has a long road to recovery
The Norwegian krone may continue to perform worse than the Swedish krona in the near future because it is more sensitive to the risk aversion period, Michael Pfister of www.xmtraders.commerzbank pointed out in a report. He said the Norwegian krone was unlikely to catch up with the Swedish crown at the moment, although both currencies should appreciate modestly this year given limited scope for further interest rate cuts. In addition to the prospect of rising risk aversion, Norway's inflation-adjusted real interest rates are unlikely to improve significantly as inflation remains elevated. Furthermore, growth in Norway is likely to slow down, while Sweden is growing strongly again.
4. The positive start to the year continues: Wall Street is coldly concerned about the changes in Venezuela, and the market’s focus has turned to non-agricultural data
The U.S. stock market rose slightly in early trading on Tuesday, continuing its gains since the beginning of the year. Investors are eyeing a slate of economic reports due later this week, led by employment data. While the U.S. military's raid and capture of Venezuelan President Nicolás Maduro over the weekend caused a stir in international politics, Wall Street reacted tepidly. Some safe-haven assets such as gold and U.S. Treasuries rose, but the Cboe Volatility Index, which measures market panic, remained sluggish, below 16. Due to trade tensions, slowing economic growth and uncertainties in AI transactions, the bull market still needs multiple positive supports if it wants to continue to strengthen in 2026. However, Adam Crisafulli, founder of Vital Knowledge, pointed out that fiscal and monetary stimulus policies are still the backing of the market. Investors this week will focus on studying the S&P Global Services PMI as well as factory orders, unemployment claims and other data to judge the Fed's interest rate path.
5. Federal Reserve Governor Milan: The interest rate needs to be cut by more than 100 basis points in 2026
Federal Reserve Governor Milan said that the Federal Reserve needs to cut interest rates by more than one percentage point in 2026, and believes that the current monetary policy is limiting economic growth. "I think it's hard to argue that policy is close to neutral," Millan said in an appearance on Fox Business Channel on Tuesday. "I think policy is clearly restrictive and is holding back the economy. I think more than 100 basis points of rate cuts this year are reasonable." Fed officials cut interest rates for the third consecutive time last month but signaled no further cuts are guaranteed in the short term. Policymakers are divided on the outlook for inflation and the labor market; they expect just one rate cut in 2026, according to the median estimate of their latest forecast. Milan's www.xmtraders.comments came after other officials said this week thatInterest rates may now be approaching a "neutral level" that neither promotes nor constrains economic growth.
Institutional Views
1. The dollar's gains are limited by expectations of interest rate cuts as the market awaits the employment report
Lee Hardman of Mitsubishi UFJ Bank said in a report that unless Friday's U.S. non-farm payrolls data is strong enough to prompt the market to reassess interest rate cut expectations, the dollar's gains may be limited. Data from LSEG shows that the market sees a 50% chance of a rate cut in March and a 70% chance of a rate cut in April, but the rate cuts are not fully priced in until June. Hardman pointed out: "Private sector employment growth may need to rebound to above 100,000 per month to prompt U.S. interest rate market participants to postpone further interest rate cuts and provide more support for the U.S. dollar early this year."
2. HSBC: The Bank of England is expected to cut interest rates further in April, July and November
HSBC economist Elizabeth Martins said in a report that UK inflation is expected to decline in the www.xmtraders.coming months, which increases the possibility of further interest rate cuts by the Bank of England. Martins said lower household energy bills and slower wage growth were expected to push UK annual inflation down to 2.1% in April and to hold it around 2% thereafter. She pointed out: "We expect the Bank of England to further cut interest rates in April, July and November, reducing interest rates to 3.00% by the fourth quarter of 2026, but this forecast still faces upward risks." Data from the London Stock Exchange Group shows that the British currency market has fully digested the expectation of a 25 basis point interest rate cut in 2026, and there may be a second interest rate cut in the second half of the year.
3. The weakening of the U.S. dollar is good for emerging market debt and the attractiveness of local currency bonds is highlighted
Candriam's Nadege Dufosse pointed out in the report that although the income growth of emerging market bonds is expected to narrow in 2026 after a strong performance in 2025, the asset class is still expected to provide high returns. She believes that a weaker dollar, lower interest rates and attractive yields will provide support for emerging market debt markets. "We are optimistic about emerging market bonds, especially local currency bonds, whose valuation levels and interest income are sufficient to www.xmtraders.compensate for related risks."
The above content is about "[XM Foreign Exchange Market www.xmtraders.commentary]: The U.S. dollar remains cautiously optimistic before the release of U.S. employment data". It was carefully www.xmtraders.compiled and edited by the XM foreign exchange editor. I hope it will be helpful to your trading! Thanks for the support!
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