The release of a number of US economic data points last week highlighted the magnitude of the threat of a recession, so that the US dollar was no longer the champion of the home market. The EUR/USD is rising.

On Tuesday, January 24, the US dollar index (DXY) fell to 101.80 in early European trading. Market trading tends to be quiet as Asian financial centers are still closed for Chinese New Year celebrations, but the reversal of the USD trend is becoming more apparent.

DXY Daily

The US dollar exchange rate has continued to weaken since the opening of trading at the beginning of the year until now. A growing number of analysts are changing their projections for the US dollar for 2023 from bullish to bearish, following the release of a slew of US economic data last week that highlighted the growing threat of a recession.

Market participants now expect the Fed to raise interest rates only two more times, each by 25 basis points, in the first half of this year. They also expect the Fed's interest rate to peak at around 5% in June, followed by two rate cuts of 25 basis points each before the end of the year. The overall market outlook is slightly more pessimistic than official forecasts from Fed officials.

"The US is no longer the cleanest shirt in the global economic laundry," said Ray Attrill, head of FX strategy at National Australia Bank, "and it is integral to our bearish view of the US dollar that the US will not be a global growth leader."

Attrill expects the US dollar index to fall to 100.00 by the end of March. Meanwhile, EUR/USD has the potential to rise further to 1.10 within the same time frame.

The euro has been getting more popular at the beginning of this year due to the rhetoric of ECB officials, who tend to be hawkish. ECB President Christine Lagarde again reaffirmed her intention to raise interest rates aggressively in a bid to control inflation on Monday.

Markets are now expecting the ECB to raise interest rates by another 50 basis points at its February policy meeting. The decision is likely to be followed by several hikes until the deposit rate peaks at a minimum of 3.3% as of July.

"President Lagarde is among the hawks, so we are comfortable with our forecast for a 50 basis point increase over the next two ECB meetings," said Joseph Capurso, a strategist at the CBA, who also estimates EUR/USD could potentially test 1.1033 in the week. This.

Hopes for that ECB interest rate hike may also backfire. The euro risks taking a hit if Lagarde fails to deliver on her rhetoric. Moreover, Euro Zone economic data for the last few months cannot be said to be brilliant.

The preliminary report on the results of the January 2023 Purchasing Managers' Index (PMI) survey, which was just released, shows a mixed situation. The German manufacturing PMI score continues to wallow below the contraction threshold, while the services sector showed a recovery from 49.2 to 50.4. France experienced the opposite situation: its manufacturing PMI is improving, but its service sector remains in recession.