Dollar's uncertain path forward, investors await key data releases

The greenback tumbled to fresh 8-month lows around 101.50 on Thursday, as measured by the USD Index (DXY). But the dollar quickly regained its footing and now stands tall at the 101.60/70 band.

Investors are now turning their attention to key data releases, as the index appears to have regained its footing and halted its gradual, multi-session descent south of the 102.00 mark. The dollar's recent struggles can be attributed to rising speculation of a potential pivot in the Federal Reserve's policy, a viewpoint that has been met with resistance by Fed officials who have continued to espouse a hawkish narrative.

Despite the dollar's current predicament, some investors are already pricing in a 25 bps rate hike at the FOMC event on February 1. However, all eyes will be on Fed Chairman Jerome Powell's press conference following the event, as he is expected to reveal the central bank's next steps.

The idea of a possible pivot in the Fed's policy continues to weigh on the dollar and keeps the DXY subdued. This viewpoint, however, is in contrast to the hawkish message from the latest FOMC minutes and recent comments from rate-setters, who have emphasized the need to maintain a more restrictive stance and keep rates climbing above the 5.0% mark. A tight labour market and a resilient economy are also seen as support for the Federal Reserve's firm message and continuation of its hiking cycle.

Key U.S. events

This week, investors will be closely monitoring several key events in the US, including Durable Goods Orders, Advanced Q4 GDP Growth Rate, Chicago Fed National Activity Index, Initial Jobless Claims, and New Home Sales on Thursday, as well as PCE, Core PCE, Personal Income, Personal Spending, Pending Home Sales, and the Final Michigan Consumer Sentiment on Friday.

Asian currencies on the rise

As the U.S. dollar rally fizzles and China eases COVID-19 restrictions, investors are turning their attention to high-risk Asian currencies. In a recent Reuters poll, it was revealed that bullish bets on the Singapore dollar and the Malaysian ringgit have reached five-year highs. Investors are bullish on all nine Asian emerging currencies for the first time in nearly two years, with bets firming after a massive downturn against the greenback last year due to the U.S. Federal Reserve's aggressive monetary tightening. The pivot towards Asian currencies is being driven mostly by China, as a manufacturing powerhouse and the region's largest trading partner, dismantling its stringent COVID-19 curbs and improving bets that local central banks are nearing the end of their tightening cycle.

This shift in investor sentiment is also driven by the possibility of a smaller rate hike by the Federal Reserve, which has been tightening monetary policy in recent years, resulting in higher interest obligations and lower operating margins for firms. The market is also keeping a close eye on the release of the US GDP data, which is expected to show a contraction in the scale of economic activities, adding to concerns about a recession.

The European Central Bank (ECB) is also facing its own set of challenges, with inflationary pressures softening but wage growth remaining a roadblock to achieving price stability. ECB policymakers are reiterating the need for more interest rate hikes in the near future.

The OPEC+ meeting is awaited

As investors focus on the uncertain economic outlook, the oil market is also facing its own set of challenges. The upcoming EU embargo on Russian refined products remains a major source of concern, with widespread dislocations expected to materialize. In addition, data showed a build in U.S. crude inventories, which reflected softer fuel demand and added to broader concerns of a slowing global economy. Global economic growth is forecast to barely move above 2% this year, according to a Reuters poll of economists, who said the greater risk was a further downgrade to their view. As the market navigates these challenges, investors will be closely monitoring the upcoming OPEC+ meeting to get a sense of where the oil market is headed in the near future.