The USD rebounded strongly against all major currencies after reaching a ten-week low, while gold and crude oil prices experienced a modest increase due to heightened US pressure on Venezuela. President Trump ordered a complete blockade of sanctioned oil tankers entering and exiting Venezuela, while global equity and bond markets remained stable.
USD’s Technical Relief Rally
Analysts report that the USD’s recovery resembles a technical relief rally, with fundamentals still favouring a lower USD. The Federal Open Market Committee has room for a 50 basis points easing projected over the next year due to weak US labour demand and inflation risks not materialising. The USD is expected to reach the lower end of its June-December range, in line with US-G6 rate differentials.
US labour data showed slower wage growth, indicating growing slack in the market. Average hourly earnings rose 0.1% month-on-month in November and 3.5% year-on-year, the lowest since May 2021. The unemployment rate ticked up to 4.6%, exceeding the FOMC’s 2025 projection, as more people entered the workforce, raising the participation rate to 62.5%.
No policy-relevant US data is available today, but a speech by Fed Governor Christopher Waller will take the spotlight. Waller’s prospects for the Fed chair job improved as doubts about frontrunner Kevin Hassett arose. President Trump is interviewing Waller today.
The dollar’s recent strength is likely a temporary bounce rather than the start of a new trend. We believe the fundamental picture still points to a weaker USD as we head into 2026. The market agrees, with the CME FedWatch Tool currently showing a greater than 70% probability of a rate cut by the March 2026 FOMC meeting.
Risks And Opportunities In Markets
Slowing wage growth and an unemployment rate at 4.6% are clear signals that the labor market is softening. This view is supported by recent weekly jobless claims, which have been trending above 250,000, and the latest JOLTS report showing job openings falling below 8 million for the first time since 2021. This growing slack gives the Federal Reserve plenty of justification to begin easing monetary policy.
Upside risks to inflation are not a significant concern, which further supports the case for a weaker dollar. The November CPI report released last week showed core inflation at 2.8% year-over-year, continuing the steady decline from the highs we saw back in 2022 and 2023. This disinflationary trend removes a major obstacle for the Fed to start cutting rates.
Given this outlook, we see opportunities in positioning for dollar weakness over the coming weeks, especially against the Euro and Japanese Yen. Derivative traders could consider buying call options on the EUR/USD or using futures to establish short-dollar positions. This strategy profits from the expectation that US interest rate differentials will narrow against the rest of the world.
The new US blockade on Venezuelan oil tankers has put a floor under energy prices, causing a noticeable spike in front-month crude oil options volatility. This suggests WTI crude prices will remain supported above $75 a barrel in the near term, making long positions in oil futures or call options an attractive tactical trade. Gold is also benefiting from this geopolitical risk, serving as a potential hedge against any unexpected market instability.
We are also monitoring the uncertainty around the next Federal Reserve Chair nomination. Governor Waller is perceived as more hawkish than other candidates, and his potential appointment could cause some short-term volatility in interest rate futures. This political variable suggests traders should remain nimble until President Trump makes a final decision.
