Forex Today: US Dollar rally pauses ahead of Manufacturing PMI data

Here is what you need to know on Friday, January 3:

The US Dollar (USD) gathered strength to start the new year as trading conditions normalized following the holiday season. The US economic calendar will feature the ISM Manufacturing Purchasing Managers Index (PMI) data for December later in the day. Investors will also keep a close eye on comments from central bank officials.

The USD Index gained more than 0.7% on Thursday and reached its highest level since November 2022 above 109.50. Early Friday, the index retreats toward 109.00. The risk-averse market atmosphere helped the USD outperform its rivals on the first trading day of the year. Additionally, the data published by the Department of Labor showed that the weekly Initial Jobless Claims declined to 211,000 from 220,000 in the previous week, further supporting the USD. 

During the Asian trading hours, the People's Bank of China (PBOC) said that it is likely to cut interest rates from the current level of 1.5% "at an appropriate time" in 2025. "The PBOC will pay more attention to the role of interest rate control and improve the formation and transmission of market-orientated interest rates," the PBOC added. Meanwhile, the National Development and Reform Commission (NDRC), China's state planner, said in a statement on Friday that it is "fully confident in achieving continued economic recovery in 2025." Following Thursday's sharp decline, Hong Kong's Hang Seng Index is up around 0.5% on the day, while Shanghai Composite Index is down 1.5%. After posting small gains on Thursday, AUD/USD continues to edge higher and was last seen trading above 0.6200. 

In the meantime, US President-elect Donald Trump reiterated his willingness to ramp up tariffs. "The tariffs, and tariffs alone, created this vast wealth for our country," Trump said on X. "Then we switched over to income tax. We were never so wealthy as during this period. Tariffs will pay off our debt and make America wealthy again." In the European morning on Friday, US stock index futures trade marginally higher and the 10-year US Treasury bond yield holds comfortably above 4.5%.

EUR/USD lost nearly 1% on Thursday and slumped to its weakest level in over two years below 1.0250. The pair corrects higher but remains below 1.2300 in the European morning on Friday.

GBP/USD dropped to its lowest level since April near 1.2350 on Thursday, pressured by the persistent USD strength. The pair holds its ground early Friday and trades near 1.2400.

USD/JPY registered small gains on Thursday but lost its traction early Friday. At the time of press, the pair was fluctuating in a tight channel above 157.00.

Gold benefited from the risk-averse atmosphere and rose more than 1% on Thursday. XAU/USD struggles to build on its recent gains but holds comfortably above $2,650.