The greenback is on track to record a third consecutive week of gains.
The dollar was bolstered by signs of resilience in the US economy and cautious remarks from FOMC officials regarding interest rate cuts this year.
One of the last to speak out on the matter was FRB Atlanta President Raphael Bostic.
He said Thursday that he expects the Fed to cut its key rate no sooner than the third quarter of this year.
Having touched the highest levels since December 13 at 103.70 on Wednesday, the greenback then entered the consolidation mode.
ING strategists believe that USD will trade in the range of 103.00-104.00, at least until the next FOMC meeting, the results of which will be known on January 31.
Commerzbank specialists doubt that a significant correction in Fed rate expectations is imminent and that the dollar will strengthen significantly as a result.
"Assuming the overall picture remains the same: and the leading central banks start cutting rates at some point in the foreseeable future, the Fed could be one of the most active players in this regard," they said.
Although traders have reduced the probability of the first reduction in US borrowing costs by March to 60%, they still expect the US central bank to cut rates by about 145 basis points by the end of the year, almost twice as much as FOMC officials themselves outlined last month.
Fed Board of Governors member Christopher Waller acknowledged this week that the regulator's 2% inflation target is within reach, but ruled out the need to rush into a first rate cut.
Stronger-than-expected retail sales figures for December, released Wednesday, sowed doubts about whether the Fed could cut rates as early as March as the central bank continues to struggle to bring inflation down from 40-year highs reached in 2022.
As policymakers open a new chapter in the debate over the timing of rate cuts, next Thursday's key U.S. inflation figure should shed some light on the matter.
However, market participants will likely prefer to wait for January's core PCE price index report to draw final conclusions on the outcome of the March FOMC meeting.
"At some point it will become clear that inflation will not easily stabilize at the target level of 2%, which the U.S. central bank is seeking, and therefore market optimism about lowering rates in the country is exaggerated," said experts at Bridgewater Associates.
"We may witness the first situation since the 1980s, when the Fed will have to resort to really painful decisions to reduce inflation, which will primarily affect the growth of the U.S. economy," they warned.
As the U.S. economy will slow, the risks of Fed policy easing will resume in the second and third quarters, leading to a weaker dollar, Scotiabank said.
"Broader central bank policy easing in the second half of 2024 should support market participants' risk appetite and strengthen the headwind for the dollar by the end of this year," the bank's analysts said.
"However, we do not think the greenback will fall too much at present and drawdowns remain a buying opportunity for USD against major currencies," they said.
"Rising US yields, seasonal trends and longer-term technical indicators point to USD strength at least over the next few weeks," Scotiabank added.
Markets still see the possibility of a Fed rate cut in March, but it's really hard to envision it happening in two months against the current economic backdrop, ING strategists say.
FOMC officials themselves want more data to support a monetary policy shift and cite the middle of the year as the most likely timeframe for a rate cut.
March has recently become something of a landmark month for the Fed - it was the month of the final rate cut in 2020 and the month of the start of monetary tightening in 2022.
At a Dec. 13 press conference, Fed Chairman Jerome Powell said the FOMC will want to cut rates long before inflation falls to 2%.
"With his recent dovish comments, Powell may have given some observers the impression that he is no longer the tough inflation fighter (a kind of Paul Volcker 2.0) that he was fond of being portrayed as not so long ago," Commerzbank experts said.
"However, this possible new image of the Fed changes the elasticity of the dollar exchange rate to inflation news. The less the U.S. monetary authorities appear to be active inflation fighters, the less high inflation data positive for the greenback will appear," they said.
"In fact, if the Fed's monetary policy is perceived as too dovish, unexpectedly high inflation could hurt the dollar. However, we are not yet at that point," Commerzbank experts added.
In their opinion, market participants are likely to be reluctant to sell euros ahead of the next ECB meeting.
"It seems most likely that the ECB will be cautious when it comes to the first interest rate cut. Even if the regulator is unlikely to deny the possibility of an interest rate cut within a year, it will probably try to dampen premature expectations. Of course, it remains to be seen whether the regulator will succeed in doing so," Commerzbank said.
Traders expect the ECB to ease monetary policy by 140 basis points by the end of the year, estimating an 80% probability that the first rate cut will come in April.
"Almost all policymakers are opposed to the possibility of an ECB rate cut, at least in the coming months. We wouldn't be surprised if they cut the rate sooner. But we still believe they will go for it in June," analysts at BMO Capital Markets said.
ECB President Christine Lagarde said the regulator is on track to bring inflation back to the 2% target, but the battle is not yet won.
Nordea strategists believe the ECB is wrong again and they see eurozone inflation below 1.5% by the end of the summer, well below the ECB's own forecasts.
"If inflation data continues to be weak, the likelihood of an earlier ECB rate cut will increase," they said.
Deutsche Bank specialists expect the first eurozone rate cut in April and a total easing of 150 bps in 2024.
"We think the ECB will reach its inflation target by mid-year, well ahead of forecasts for 2025," they said.
While the strength of the U.S. economy gives Fed policymakers room to maneuver, weak growth in the eurozone suggests the ECB will cut rates sooner rather than later.
This is bad news for the euro, and experts at Rabobank warn that the single currency could face further tests if Donald Trump's move towards a potential second term in the White House continues.
"Trump's stance on NATO and likely climate change could cost Europe dearly and increase the dollar's attractiveness as a safe-haven asset. We see scope for EUR/USD to decline to 1.0500 in the three-month timeframe," they said.
The euro tested the $1.0850 area twice earlier in the week, but the lack of subsequent selling pressure allowed the single currency to avoid further losses, at least for now, Scotiabank economists said.
A break above the 1.0910-1.0920 area could provide EUR/USD with a short-term lift, but there seems to be as little interest among market participants in the pair's upside as there was in the downside earlier this week, they believe.
Meanwhile, Rabobank believes that further confirmation that inflation in Japan has peaked is likely to add pressure on the yen in the near term.
"Given our view that market optimism about the pace of Fed rate cuts this year will continue to wane, we expect further broad-based USD gains in the one to three month range," analysts at Rabobank said.
They raised their one-month USD/JPY outlook to 148 from a previous forecast of 144.
The yen has depreciated more than 5 percent against the dollar since the start of the year as weak inflation data and a devastating earthquake in the central part of the Land of the Rising Sun undermined confidence that the Bank of Japan is about to raise rates.
"The market's realization that a rate hike will not be easy for the Bank of Japan in the coming months and the simultaneous reassessment of the risks of a Fed rate cut have already been reflected in the dollar's rise against the yen," Rabobank economists said.
This month, the USD/JPY pair went upward. Even if dollar strength may have been partly to blame, skepticism about Japanese monetary policy also likely played a role, Commerzbank strategists said.
"If the Bank of Japan makes it clear next week that it does not intend to change the course of monetary policy for now, which we think is likely, the USD/JPY pair could rise a little more," they said.
Mizuho Securities predicts that the yen could exceed 150 per dollar by early February if the Bank of Japan sticks to its dovish attitude next week and Fed Chairman Jerome Powell takes a similar stance to Christopher Waller at the next FOMC meeting on January 30-31.
The Bank of England also found itself in a difficult position as data released earlier this week showed that UK inflation unexpectedly accelerated in December, while the country's retail sales marked the biggest drop since January 2021.
The headline CPI reading in the United Kingdom rose to 4% year-on-year last month after climbing 3.9% in November.
"In the U.S. you can see that inflation is coming down, but in the U.K. it is certainly less noticeable," Nordea said.
"The bottom line is that the Bank of England is in a difficult position and policymakers will have to wait a little longer for data before seeing if there will be an opportunity to cut rates in June as the market expects," they added.
Meanwhile, retail sales in Foggy Albion fell by 3.2% between December and November.
"The effects of the cost of living crisis and the sharp rise in interest rates are still weighing on real incomes and consumer spending," experts at Capital Economics said.
They forecast that inflation will reach target in the UK sooner than in other major advanced economies.
"Our revised forecast implies a cut in the country's bank rate to 3% by the end of the easing cycle, which is about 40 bps below what investors are currently pricing in," Capital Economics analysts said.
"In contrast, market expectations are broadly in line with our forecast for the US interest rate. Taken together, our forecasts suggest a shift in the short-term yield gap in favor of the dollar," they said.
Capital Economics strategists also believe the pound is overvalued at current levels, leaving plenty of scope for sterling to fall.
"We are sticking to our forecast for GBP/USD to decline to 1.2000 by the end of the year from current levels above 1.2600", they said.
While the Bank of England is closely watching the data to determine when it might cut interest rates, the sideways range for GBP/USD that has existed over the past month or so remains intact, economists at Scotiabank said.
"GBP/USD has pulled back from the previous low and is holding just below the midpoint of the 1.2600-1.2825 trading range that has existed since mid-December. Neither daily nor weekly charts provide a clear indication of the future direction of the move," they said.
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