The euro was firmer as the dollar turned lower, but difficult economic conditions in the eurozone might constrain its progress, CPT Markets said.
The European Central Bank could face mounting pressure to reduce interest rates if economic indicators continue to deteriorate, weakening the euro, CPT said.
Money markets price in 160 basis points of ECB rate cuts throughout the year, according to Refinitiv data.
German inflation data on Thursday could impact the euro, while eurozone inflation figures on Friday will be key for highlighting the path of inflation, CPT added.
Commerzbank said the dollar has risen at the start of 2024, recovering some of its recent losses but without any apparent trigger, and its gains could be curtailed without strong economic data.
Friday’s non-farm payrolls data for December will be key, where Commerzbank sees a risk of a weaker figure, while Thursday’s ADP private payrolls could also “surprise to the downside.”
Morgan Stanley has turned neutral on the outlook for the USD. The bank said its prior conviction about the currency’s ongoing strength has waned meaningfully.
Investors appear to be adopting the mentality that a peak in Fed hawkishness will be enough to overwhelm USD positives such as potential upside surprises to U.S. growth, downside growth surprises abroad, or an uptick in U.S. inflation, the bank said.
USD strength is harder to envision as U.S. interest rates have fallen further compared with peers, it added.