HG MARKETS:

The US dollar extended its gains on Monday, maintaining elevated levels after stronger-than-expected US payrolls data bolstered sentiment. The Dollar Index, which measures the greenback against a basket of six major currencies, climbed 0.4% to 109.93, marking its highest point since October 2022 after Friday’s surge.

The dollar received a notable boost from December’s US employment report, which revealed an unexpected acceleration in job growth and a decline in the unemployment rate to 4.1%. This prompted traders to reassess their expectations for Federal Reserve rate cuts this year. Market pricing now reflects only 27 basis points of potential rate cuts in 2024, compared to roughly 50 basis points anticipated at the start of the year. The December US Consumer Price Index (CPI) report, scheduled for release on Wednesday, will be a key focus. Any upside surprise could diminish the likelihood of Fed rate cuts this year and even question the necessity of easing altogether.

Meanwhile, GBP/USD slid 0.7% to 1.2117, hitting a 14-month low following last week’s 1.8% decline. Growing concerns over the UK’s fiscal health and rising borrowing costs have weighed heavily on sterling. Sterling’s trajectory remains precarious, with Wednesday’s release of the December UK CPI data likely to be pivotal. Analysts warn that regardless of the inflation figure, the implications for the Bank of England’s monetary policy could exert further pressure on UK gilts and the currency.

EUR/USD dropped 0.4% to 1.0195, its weakest level since October 2022. The euro continues to face headwinds as the European Central Bank (ECB) is widely expected to reduce interest rates by approximately 100 basis points in 2025, with most cuts anticipated in the first half of the year. This outlook reflects expectations that inflation will approach the ECB’s 2% target by mid-2025.

In Asia, USD/JPY edged 0.3% lower to 157.23 amid subdued trading volumes due to a holiday in Japan. Market participants remain cautious ahead of an upcoming Bank of Japan meeting. The currency pair also reflects broader concerns tied to global trade dynamics. Exporters have reportedly accelerated shipments to the United States ahead of potential tariffs under President-elect Donald Trump, who has vowed to impose steep trade measures against China upon taking office on January 20.

The US dollar remains firmly supported by resilient economic data and expectations of further monetary policy divergence, while European and UK currencies face continued challenges amid economic and policy uncertainty. All eyes will now turn to Wednesday’s inflation data releases in both the US and UK, which could significantly influence the direction of global currency markets.