The US dollar was weighed down by a sharp decline in the US Nonmanufacturing PMI data for December 2023.

The US dollar weakened in early trading this week (8/January), particularly against the yen and the pound sterling. The US Dollar Index (DXY) fell more than 0.3% to around 102.10, while market participants are still trying to analyze some of the US economic data released last week.

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The US dollar initially rallied after the release of Non-farm Payroll data that exceeded expectations on Friday. However, the rally did not last long. A sell-off immediately hit the greenback after the release of US Non-manufacturing PMI data showed a very sharp slowdown in December 2023.

CME's FedWatch currently shows a 66% chance of a Fed rate cut starting in March. The release of Nonfarm Payroll data and a hawkish statement by a Fed official has lowered the probability from 89% at the beginning of last week, but the PMI data supports the view of the majority of traders who believe a Fed rate cut will take place.

The USD pullback has continued until now. USD/JPY slipped around 0.6% to 143.75 levels at the time of writing, while GBP/USD climbed around 0.3% to the 1.2760s range.

"Friday's Nonfarm Payroll data was rather mixed. The headline number was quite high and good, but there were many parts of the data that also showed greater weakness in the labor market," said Helen Give, an FX trader at Monex USA, as reported by Reuters, "There are clearly cracks slowing the pace of hiring in the US, and the labor market is weakening."

Traders and investors will next highlight the release of US CPI inflation data on Thursday. The provisional consensus expects inflation to increase 0.2% every month, or 3.2% on an annualized basis. Actual data deviating from the forecast will affect the Fed's interest rate expectations, which could trigger turbulence in the major currency pairs.