US dollar makes a comeback after NFP smashes expectations

The current trading environment is marked by volatility and choppiness, with most currencies trading within tight ranges throughout January. This can be attributed to a combination of the absence of major news events and anticipation surrounding announcements from central banks such as the Fed, ECB, and BoE.

Starting with the Fed, their latest move was in line with expectations - a smaller 25bp hike was announced on Wednesday, following a 50bp hike in December. This move was heavily telegraphed and already priced in, with no updated projections or dot plot released. The focus was instead on the Fed's communications.

The Fed's statement remained largely unchanged, and speculation surrounding a tweak to the language regarding "ongoing rate increases" proved to be unfounded. Powell's comments were considered dovish, with a focus on the Fed's "no desire to overtighten" and acknowledgement that a "disinflationary process" had begun in the US.

The market reaction was swift, with a selling of the USD across the board. The USD Index saw a drop of nearly 1% on Wednesday, and the EUR/USD broke above the $1.10 level for the first time since April. However, the dollar has since recovered sharply and we will discuss the reasons for this shortly.

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