The USD bounced back sharply against all major currencies after hitting a ten-week low. Meanwhile, gold and crude oil prices edged up due to increased US pressure on Venezuela. President Trump has enforced a complete blockade on oil tankers linked to Venezuela. Global equity and bond markets remained stable.

USD’s Technical Relief Rally

Analysts say the USD’s rebound looks like a technical relief rally. However, the underlying factors still suggest a weaker dollar. The Federal Open Market Committee (FOMC) may lower rates by 50 basis points over the next year, given the weak demand for labor and limited inflation risks. The dollar is expected to hit the lower range it had from June to December, reflecting the differences in interest rates between the US and G6 countries. Recent US labor data shows slower wage growth, which indicates a softening job market. In November, average hourly earnings rose by just 0.1% from the previous month and 3.5% from the previous year, the slowest growth since May 2021. The unemployment rate increased to 4.6%, higher than what the FOMC projected for 2025, as more people are joining the workforce, raising the participation rate to 62.5%. There is no major US data scheduled for today, but Fed Governor Christopher Waller will give a speech. His chances of becoming Fed chair have improved, especially with questions surrounding frontrunner Kevin Hassett. President Trump is interviewing Waller today. The dollar’s recent strength is probably a short-term bounce, not the start of a new trend. The outlook still suggests a weaker dollar as we approach 2026. The market agrees, with the CME FedWatch Tool indicating over a 70% chance of a rate cut by the March 2026 FOMC meeting.

Risks And Opportunities In Markets

The slowdown in wage growth and the rise in the unemployment rate to 4.6% signal a weakening labor market. Weekly jobless claims are consistently exceeding 250,000. The latest JOLTS report shows job openings have dipped below 8 million for the first time since 2021. This trend gives the Federal Reserve reason to start easing monetary policy. Inflation risks aren’t a major worry right now, which supports the argument for a weaker dollar. The November CPI report published last week showed core inflation at 2.8% year-over-year, continuing its steady decline from the highs of 2022 and 2023. This downward trend helps clear the path for the Fed to cut rates. Given this outlook, we see opportunities to bet on dollar weakness in the coming weeks, particularly against the Euro and Japanese Yen. Derivative traders might consider buying call options on the EUR/USD or using futures to build short-dollar positions. This approach could profit from expectations that US interest rates will come closer to those in other countries. The new US blockade on Venezuelan oil tankers is putting upward pressure on energy prices, contributing to increased volatility in front-month crude oil options. This suggests that WTI crude prices will likely stay above $75 a barrel in the short term, making long positions in oil futures or call options a good tactical choice. Gold is also benefitting from this geopolitical risk, serving as a potential hedge against unexpected market volatility. We are keeping an eye on the uncertainty surrounding the next Federal Reserve Chair nomination. Governor Waller is seen as more hawkish compared to other candidates, and his likely appointment could result in short-term volatility in interest rate futures. This political uncertainty suggests traders should stay flexible until President Trump makes a final decision. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now