The US dollar continues its rally; this week's non-farm payroll data may be the turning point

Last week, the foreign exchange market showed a clear dollar-dominant pattern. The US Dollar Index rose by 0.39%, and non-US currencies collectively came under pressure — the euro fell by 0.44%, the Australian dollar declined by 0.38%, the British pound dropped by 0.28%, and the Japanese yen had a relatively small decline of 0.18%. What is driving this strength in the dollar? Let’s analyze it one by one.

Why is the US dollar continuing to strengthen?

The key factor is the Federal Reserve’s policy signals. The December meeting minutes revealed that committee members are divided on the pace of future rate cuts, and this uncertainty has actually provided support for the dollar. Another driving factor is the escalation of geopolitical risks, which boosts risk aversion sentiment and increases demand for the dollar.

From market expectations, according to data from the CME FedWatch Tool, institutions still expect the Federal Reserve to cut rates twice by 2026, with a 61.1% probability of a rate cut in April. However, these expectations could change at any time based on new data.

EUR/USD: The key lies in non-farm payroll data

EUR/USD fell by 0.44% last week, clearly demonstrating the strength of the dollar. From a technical perspective, the euro has broken below the 21-day moving average and is currently near the 100-day moving average at 1.166. If it further breaches this support, a larger decline could open up, with support levels at 1.160 and the previous low at 1.149. Conversely, if it holds above the 100-day moving average, the rebound could target around 1.180.

The key date ahead is January 9 — the US will release the December non-farm payrolls data. Market expectations are for about 60,000 new jobs and an unemployment rate of 4.6%. If the data exceeds expectations, it will reinforce the Fed’s rationale to maintain high interest rates, further pressuring the euro; if the data is weaker, it will be positive for a euro rebound. Additionally, geopolitical developments in places like Venezuela are also worth monitoring. If risk aversion increases, the dollar will continue to benefit.

Yen depreciation accelerates, intervention expectations weaken

USD/JPY rose slightly by 0.18% last week, but more importantly, market expectations for Japanese government intervention in the currency have significantly cooled. Satoshi Sato, Chief Strategist at Fukuoka Financial Group, stated that Japanese authorities might wait until the exchange rate breaks through 165 yen per dollar before taking action, leaving more room for yen depreciation.

There is considerable disagreement among institutions regarding the yen’s outlook. Mitsubishi UFJ Morgan Stanley Securities believes that although the Bank of Japan will raise interest rates, active fiscal policies by the government will weaken the effect of rate hikes, and they forecast USD/JPY to rise to 160 by the end of 2026. Nomura Securities, on the other hand, takes a contrarian view, expecting the new Fed Chair to cut rates by 25 basis points in June and September, which would push USD/JPY down to 140.

From a technical perspective, USD/JPY remains above multiple moving averages, with strong bullish momentum. Resistance is at 158, and support levels are near the 21-day moving average at 156.

What to watch for this week?

In addition to the December non-farm payroll data on January 9, pay close attention to signals from Japanese government officials and the progress of US President Trump’s nomination for the Federal Reserve Chair (reported to be announced as early as January). These could all serve as triggers for market volatility.