USD: Rally may lose some steam - ING

The Christmas holiday period was not particularly eventful for FX markets, but it was again remarkable how the dollar kept finding support, defying both seasonal negative pressure and a brief rally in US Treasuries at the end of December. The new year started with a new dollar rally and European currencies coming under pressure, ING's FX analyst Francesco Pesole notes.

DXY can reach 110.0 in the coming weeks

"This week will see a return of normal market conditions and a pick-up in FX liquidity. That may lead to some softening in the dollar's momentum, as the greenback could reconnect with the slight deterioration in its rate advantage over the holiday period. But while technical factors signal that the dollar rally at the start of the year is overdone, the proximity to Donald Trump's presidential inauguration should prevent a substantial rotation away from defensive dollar longs. Incidentally, January and February are two seasonally strong months for the USD."

"This will also be the week where data retakes centrality. The hawkish December FOMC has, in our view, set the bar higher for any data disappointments to hurt the dollar, as pricing for a rate cut in March (January looks implausible) may prove sticky. There's currently 12bp priced in for March, 17bp for May and 25bp for June. Adding to the hawkish narrative, we heard two FOMC members (Mary Daly and Adriana Kugler) revamping inflation concerns. An effective re-focus of the Federal Reserve on the price side of its mandate would provide a fresh bullish narrative for the dollar."

"Our tactical view in FX remains unchanged from last week. Technical factors argue for some correction or at least loss of momentum for the dollar, but we expect strong buying interest in the dips. Ultimately, the 110.0 target remains very much at reach for DXY in the coming weeks."