After edging lower in the final days of 2016, the US Dollar has started off the New Year with a strong performance, trading up by +0.74% (per DXY Index) at the time this article was written. The greenback is shrugging off what appears to have been simply profit taking at the end of December, rather than uneasy hands losing the appetite for their positioning.
The rally in DXY today is not a result of broad USD strength; both AUD/USD and GBP/USD are trading to the topside, if only slightly, this morning. The Euro's considerable weighting in DXY Index (57.6%) is reflecting the sharp downside seen in EUR/USD the past few days: DXY Index has quickly regained its bullish posture and now looks poised for a test of the 2016 high near 103.64.
Price action between December 15 and today, in context of the past two months of trading, looks like a bullish flag consolidation. The measured moved higher would see DXY trade to 105.23 in the coming days and weeks. In such an event, it would likely require more EUR/USD weakness; a break below 1.0352 should be eyed.
Meanwhile, looking out over the course of the week, the main concern for FX markets will be the December US Nonfarm Payrolls report on Friday. In light of the fact that the FOMC suggested it could hike rates two or three times this year, the bar is high for US economic data (particularly labor and inflation data) to remain on track in order to justify the steeper rate hike expectations curve that has buoyed the US Dollar.
Currently, Fed funds futures are pricing in 25-bps rate hikes in June and September 2017; markets don't think that the Fed will raise rates when they release their first SEPs in March this year.
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