December NFP: Where to for the USD?

• Markets expect to add more than 200k jobs in November.
• According to the FedWatch Tool, the Feds are considering a lower rate hike for December.
• Dollar bears could accelerate amidst the weaker NFP reading.

December is generally a quiet month for the markets, but there is a solid risk appetite as we head into the December NFP report.

What to expect?

The market anticipates that the US economy will generate another 200k jobs in November, following growth of 261k in October. Additionally, the unemployment rate improved from 3.7% to 3.6%.

It should be highlighted that the 200k more jobs, while good, represent the slowest pace of employment creation for 2022 and may contribute to the labor market loosening as financial conditions tighten.

According to the Bureau of Labor Statistics, the main consumer price index fell from 8.3% in September to 7.7% in October.

Tomorrow’s NFP report will focus on employment and wage growth changes since both are important to the Fed when determining monetary policy.

Less Hawkish Powell

FOMC Chairman Jerome Powell stated that it would be wise to slow the pace of interest rate increases. Powell also stated that rates must eventually rise slightly higher than policymakers anticipated in September.

The Fed’s decision to decrease the current pace of interest rate hikes is supported by a slowdown in the job creation process, a slowdown in growth rate, and a surprise fall in October’s inflation, all of which have put the Fed in a situation where the rate rise pace may be slowed.

The Fed’s primary goal is to achieve price stability, but it is not proper to crash the economy and clean it up afterwards, as stated by Powell.

Following Powell’s comments, the CME Group’s FedWatch Tool shows that markets are pricing in a nearly 80% chance of a 50 basis point Fed raise in December, up from 66%.

The prospect of Fed tightening is boosting investors’ sentiments as they look for non-aggressive interest rate hikes. The NFP will weigh in on that decision, and the markets will get a clear picture.

What’s up with the Greenback?

The USD remains under pressure on the first trading days of December as investors prepare for a lower Federal Reserve rate rise.

The US dollar index had a difficult month in November, falling below several key levels consistently supporting this year’s advance.

The dollar’s uptrend has been significantly dented. Still, in the near term, the world’s reserve currency is certainly oversold and might see a comeback in the aftermath of the NFP.

Where to for the USD?

A stronger-than-expected report might support the US Dollar while also attracting new supply for GBPUSD, EURUSD, and AUDUSD and may attract demand for USDCAD, USDCHF, and USDJPY.

Any disappointment, on the other hand, will add to concerns of a worse economic slowdown and impact on market mood, which should work as a tailwind for the safe-haven Greenback.

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