USD: Entering favorable seasonality - ING

Trump's policy mix will trigger further US Dollar (USD) strengthening, with European currencies - and the Euro (EUR) in particular - coming under pressure from protectionism and monetary easing. Emerging market currencies should have a tough year too, ING's FX analyst Francesco Pesole notes.

Macro and political story continues to point to 110.0 in DXY

"The USD is seasonally strong in January and February. Interestingly, last month was also a strong one for DXY (+2.6%), breaking a seven-year losing streak in the month of December. That showed macro factors and expectations for Trump's policies were strong enough to counter the negative seasonal effect. Now that seasonality turns positive, we'd need a U-turn in that narrative that has kept the dollar strong into year-end. We are not expecting any rapid deterioration in the labour market, but rather a gradual one that is consistent with the Federal Reserve staying cautious on easing."

"The President-elect has already been quite vocal on some policy promises since his electoral triumph, and markets are pricing a good deal of macro implications. Unless he softens his tone on protectionism and/or fiscal stimulus into inauguration day (20 January), the dollar should count on a solid floor at the start of this month. The tail risk for USD remains any serious talk about a Plaza Accord 2.0 to artificially devalue the dollar."

"Turning back to the US calendar, jobless claims surprisingly slowed to 211k in the last week of 2024. Meanwhile, the ISM releases its manufacturing index for December this afternoon. This gauge has been in contraction territory in every month but one since late 2022. Today's print will tell us whether the modest optimism from November's above-consensus 48.4 was justified or just a fluke. Consensus is leaning toward the latter (expecting 47.5 today). The USD was immune to the New Year's Eve rally in Treasuries and probably has some modest room to catch up on the downside once liquidity is fully reestablished. That said, growth concerns and rising gas prices remain a bearish argument for European FX - as discussed below - and we expect strong buying of the dollar on any dips in the event of a short-term correction. The macro and political story continues to point to 110.0 in DXY."