Geopolitics & Powell’s Words Impact the US Dollar

US Dollar Shows Resilience After Strong NFP Report

The foreign exchange market began the week with a dynamic performance, where the US Dollar (USD) took centre stage. The USD displayed resilience against major currencies, building on momentum from an impressive surge. Factors such as escalating geopolitical tensions and the hawkish remarks of Federal Reserve (Fed) Chairman Jerome Powell bolstered the Dollar’s strength. Market participants are also eagerly anticipating the release of the ISM Services PMI report, which is expected to provide further insights into the economic landscape.

US Dollar Index Gains Ground

The US Dollar Index (DXY) made notable gains, surging by nearly 1% following an outstanding Nonfarm Payrolls (NFP) report for January. The Bureau of Labor Statistics reported a remarkable increase of 353,000 in nonfarm payrolls, surpassing market expectations by a substantial margin. During a televised interview with CBS News’s “60 Minutes,” Powell underscored that it is premature to confidently contemplate rate cuts during the upcoming March policy meeting. He highlighted the possibility of earlier action if labour market conditions deteriorate or if inflation convincingly declines. Consequently, the DXY soared, briefly surpassing 104.00 during the Asian trading hours, reaching its highest level since early December.

Geopolitical Tensions Persist: Euro and Pound Under Pressure

Geopolitical tensions remained in the spotlight as the US and the UK conducted a series of airstrikes targeting the Iran-backed Houthi militant group in Yemen over the weekend. These strikes hit approximately 30 targets, prompting retaliatory threats from Yemen’s Houthi rebels, who vowed to extend their military operations. Reflecting this risk-averse sentiment, US stock index futures started the week down by approximately 0.25%.

The EUR/USD pair faced significant downward pressure on Friday, concluding its third consecutive week in negative territory. The US Dollar to Euro traded in a narrow channel below 1.0800, impacted by the stunning US jobs data that surpassed even the most optimistic forecasts. The robust labour market data raised doubts about the possibility of a Fed rate cut before the summer. The probability of a rate cut in March, which had previously stood at 80%, has now plummeted to 15%, with expectations for further cuts in 2024 diminishing significantly.

The GBP/USD pair also faced pressure, sliding toward the 1.2600 level after a 0.9% loss on Friday. Bank of England Chief Economist Huw Pill’s online Q&A session at 17:30 GMT on Monday will be closely monitored.

In the Asian session, USD/JPY made significant gains, nearing the 149.00 level, reaching its highest point since late November. However, as market sentiment soured, the pair retreated below 148.50, with the Japanese Yen (JPY) benefiting from the risk-off mood.

ISM Services PMI on the Horizon

The focal point of the day is the release of the ISM Services PMI report in the US. A lack of surprises in this data may sustain the US Dollar’s mild upward momentum, given the recent positive NFP data. Geopolitical tensions, if exacerbated, could further bolster the dollar’s position. Nonetheless, the euro will put up a fight, with the 1.07 level serving as robust support.