A busy week kicks off the new year on the markets

The dollar index is little traded on Monday because most countries are celebrating their new year's holidays. However, the greenback gained nearly 8% in 2022 after the Federal Reserve decided to embark on one of its most aggressive rate-hike cycles in history to curb runaway inflation.

Even so, the dollar has been weakening in recent months after data indicated that U.S. inflation is likely to have peaked. This means the Federal Reserve may slow its rate hikes in the future. In December, the central bank hiked its rate by a relatively-small 50 basis points, and it is projected to raise it by 25 basis points in February.

A weaker dollar and slower Fed rate hikes by the US Federal Reserve led to a slight rise in Asian currencies in holiday trade on Monday.

As a result of strong gains last week, the Japanese yen increased 0.1% to 130.96 - its highest level for five months against the dollar. Despite falling 15% in 2022, the currency regained some lost ground at the end of the year, particularly after the Bank of Japan unexpectedly struck a hawkish note at its December meeting.

However, increased headwinds are expected for the Japanese economy, especially as high inflation and uncertainty about the COVID-19 pandemic continue to weigh on growth. Japanese consumer inflation in November hit a 41-year high last month.

The oil price is predicted to increase modestly in 2023 as a darkening global economic backdrop and COVID-19 flare-ups in China threaten demand growth. Brent crude oil price has fallen more than 15% since early November. It was trading around $84 a barrel on Friday, as rising COVID-19 cases in China dampened expectations for oil demand growth.

Among the closely watched potential market movers this week are:

FOMC meeting minutes

While the Fed decided to tone down its aggressiveness at their December meeting, a few hawkish twists were still announced even though they hiked at 0.50%. Although this represented a slower pace than their previous 0.75% hikes, the Fed still raised rates by 0.50%. Inflation forecasts for 2023 and 2024 were upgraded by the FOMC, indicating further tightening is coming up. Aside from that, Powell reiterated that the Fed would not be complacent about a slight drop in price pressures. Transcripts of their meeting should shed more light on what policymakers have planned for the coming months, possibly setting the direction of the dollar.

EU inflation figures

A slowdown in price pressures for the economy is likely to be evident when the December 2022 inflation report is released. This is because the reading is expected to show a 0.1% decline in price pressures for the month. While we are waiting for the flash CPI data from the eurozone (Jan. 6), which will be released later in the week, there is a slight drop forecast in headline inflation in the month of December. The headline inflation figure is expected to drop from 10.1% to 10.0% year over year, while the core figure is predicted to remain at 5.0%. If the headline inflation figure drops below expectations, it might suggest that tightening measures are starting to take effect. This may lead the European Central Bank to slow its rate hike pace in the near future.

US non-farm payrolls

As part of this week's economic events, it will be interesting to watch Uncle Sam's Non-Farm Business Statistical Report, which may provide some insight into the Federal Reserve's outlook. Based on the numbers crunchers, it's predicted that hiring will slow down once more in December 2022, with a reading of 200K for the month. As always, the average hourly earnings figure is likely to attract interest as well, since wage growth is considered to be an accurate measure of inflation. This should be enough to keep the unemployment rate steady at 3.7%. In December, the unemployment rate is expected to drop from 0.6% to 0.4%. 

There are other leading indicators that will be of interest throughout the week, such as the ADP non-farm employment change, the JOLTS job openings, the ISM manufacturing PMI, and Challenger job cuts.