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Dollar exchange rates will continue to churn around current levels ahead of Friday's non-farm payrolls report which will be the currency market's first major calendar event of 2023.

Any unexpected deterioration in the data would suggest the impact of recent interest rate hikes is starting to have an impact on economic and labour market activity, which could reverse some of this week's Dollar-supportive developments.

A weak data release would therefore be consistent with the multi-week recovery in the Euro to Dollar exchange rate (EUR/USD).

But should the payroll data come in stronger than expected then the Dollar would likely find further support and extend the EUR/USD exchange rate's January decline.

"We are particularly focused on the NFP print where we sit appreciably above consensus for a strong number. That may be enough to shift short-term USD dynamics biased to trade on its front foot," says a daily currency research briefing from analysts at TD Securities.

The market is currently poised for a reading of 200K jobs, a slowdown on November's 263K.

Ahead of the release EUR/USD is trading at 1.0610 as the pair looks to recover the sharp losses experienced on the first trading day of 2023 when a 1.13% loss was experienced.

The cycle highs are located at 1.0720 and a weaker-than-expected reading would potentially allow for another test of this level.

A weak reading would suggest the Federal Reserve can afford to ease the pace at which it raises interest rates and would embolden the idea that the Fed is close to ending its current cycle.

This would deny the Dollar the support conferred to it by the Fed's rate hiking cycle over the course of 2022.

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The Fed does however look to be cautious of signalling it is prepared to slow down, with the release of December's FOMC meeting minutes midweek confirming policymakers continue to favour higher interest rates.

"The Fed minutes offered a tinge of hawkishness with concern over a loosening of financial conditions," says TD Securities. "It is at a minimum consistent with the idea that it may be difficult to push USD weakness in the near-term."

Incoming data is also consistent with the need for the Fed to remain vigilant with above-forecast prints for U.S. ISM employment index and JOLTs job openings confirming the labour market remains tight enough for the Fed to maintain a focus on higher rates.

ISM's Employment Index returned to expansion territory (51.4%, up 3 percentage points) after contracting in November (48.4%). The U.S. Bureau of Labor Statistics meanwhile said the number of job openings was little changed at 10.5 million on the last business day of November, defying expectations for a retreat to 10m.

"In short, the labour market is still not showing any sign of cooling after 425bp of tightening according to the first anecdotes for December," says Kenneth Broux, an analyst at Société Générale.

The Fed will want to see the labour market deteriorate before considering a retreat from its policy of raising interest rates, this is because the healthy labour market is consistent with rising wages which is in turn an inflationary force.

These dynamics underscore the importance of Friday's non-farm payroll figures for EUR/USD performance this January.

"The wash-out in long USD positions combined with the continued hawkish position of the Fed, should be a warning to USD bears. Even if the USD has peaked, we anticipate that this will be a choppy and potentially lengthy process," says Jane Foley, Senior FX Strategist at Rabobank.

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