Investors are getting ready for Christmas. Monday will be a holiday, but the market sentiment is not really Christmas-like. Although there was a hint of something positive. However, it was only because the markets were just tired of falling.
On Thursday, new economic data continued to add to the already weak sentiment. The final report showed that the US economy grew 3.2% in the third quarter, up from 2.9% previously reported.
The new weekly report on jobless claims continued to point to a healthy labor market. Applications rose by 2k to 216k for the week, below market expectations of 220k. This, along with higher GDP numbers, strengthens the case that the Federal Reserve will continue to raise interest rates and eventually resort to more aggressive policy.
The dollar, which has been under pressure from the rising yen in recent days, has rebounded. The U.S. currency index strengthened above 104.00.
Obviously, the dollar stopped falling. However, don't expect any major shifts until the end of the current year. The key reports and events are played back, and many traders and investors will go on Christmas vacations.
If geopolitical risks intensify, the dollar is capable of showing a rally. Then there's China's "zero-COVID" policy. The situation in China is heating up, the markets may start to doubt that the authorities will be willing to stick to the new strategy.
No speeches from representatives of the US central bank, the next important event will take place on January 4 – this is the release of the minutes of the Fed meeting. There are doubts that the data will be able to shake the markets amid low volatility during the holiday period.
Overall, January should play on the side of the dollar bulls. ING economists remain bullish in early 2023.
"The dollar index could end the year near current levels. It's worth noting that the dollar has rallied in January in each of the last four years. We are leaning toward its recovery in early 2023," economists write.
Euro is trying to stay bullish, technical and fundamental factors are on the side of the bulls. However, on Thursday, the bulls were out of luck and couldn't keep the currency above 1.0600.
The euro got a brief boost from comments by European Central Bank Vice President Luis de Guindos. The official said that increases of 50 basis points may become the new norm in the near term, in line with last week's hawkish comments from the central bank's head.
The dollar's evening spurt somewhat blurred the positive picture for the euro.
Judging by the daily chart, the EUR/USD pair has been fluctuating in a narrow range since the beginning of the week. The pair is still likely to grow in the short term. At the same time, weak volatility and market activity can neutralize all this positive and lead to a decrease in bullish momentum.
In the short term, the euro will look technically neutral. The pair's movement will determine the appetite for risk.
Support levels are located at 1.0580, 1.0535 and 1.0480. Resistance is at 1.0650, 1.0695 and 1.0740.
As for the pound, the bulls are even more restrained. GBP/USD managed to stay sideways above the important 1.2100 mark on Thursday, despite the weak UK data. The economy grew at a slower rate than expected in Q3. On an annualized basis, GDP growth was 1.9%, significantly different from market expectations of 2.4%.
The data did not weigh on the pound enough for it to fall. At the same time, the dollar was able to spoil the picture. During the hours of the US session, the GBP/USD pair was still forced to pass the 1.2100 mark and move further.
It is worth noting that it will be hard for the pound to compete with the dollar in 2023. The greenback can regain the advantage due to the divergence in the policy of the Fed and the Bank of England. In addition, economic problems in Britain will keep the downside risks to sterling.
Looking at the GBP/USD charts, we can see that the bears are in control of the situation. A breakdown of 1.2100 means that traders will start to act and push the quote to 1.2040, and then to 1.2000.