FX Update : New Year, New Budgets

The dollar's fortunes for the New Year will largely hinge on the direction of the US economy and the Federal Reserve rate outlook.

To that end, payrolls on Friday and the FOMC minutes on Wednesday will be the main highlights of this week. The labour market has shown resilience in the latest weeks but we doubt whether it can be sustained.

The FOMC minutes for the Dec 12 meeting will be scrutinised to see whether inflation risks remain the key focus or sluggish growth and potential easing is entering the fray.

However, given the relatively positive tone of data leading up to the Dec 12 meeting, it seems unlikely that there will be a marked shift in tone by Fed officials in favour of near-term rate cuts.

Investors will be only returning gradually from their holidays this week and typically market liquidity and price action occurs in the second week of the New Year. We suspect that many clients remain bearish on the dollar, and the New Year brings fresh budgets and a new appetite to trade underlying conviction.

To that end, the dollar will be particularly vulnerable to any downside disappointment in this week's payrolls, or a surprisingly dovish tone to the FOMC minutes.

Looking ahead, and former US President Ford's funeral is held today. Equity markets will be close and bond markets half open. However, FX markets will operate as per normal.