Dollar Weakness Deepens as Softer Employment Data Triggers Broad Currency Retreat

Market Overview: DXY Reaches Three-Month Lows

The US Dollar Index has slipped below the 98.00 level, marking its weakest performance since October, following disappointing labor market indicators that have fundamentally shifted sentiment in currency markets. The recent employment data painted a picture of cooling job market momentum, prompting significant position unwinding in USD-denominated assets. This retreat has given breathing room to several major currency pairs that had been under considerable pressure.

Currency Pair Breakdown: Where the Action Is

EUR/USD: Yield Compression Supports Upside Potential

The euro has found support around 1.1750 as the interest rate differential between the Fed and ECB narrows. Despite persistent weakness in German manufacturing activity (reading of 47.7), the pair has managed to rally on this technical support. Traders should monitor whether the EUR can break higher as dollar weakness persists.

GBP/USD: UK CPI in Focus This Week

Sterling is consolidating near 1.3430, with attention now shifting to the UK Consumer Price Index release on Wednesday. The market expects a benign 0% monthly reading with a 3.5% annual print for November. The Bank of England’s rate decision on Thursday will be critical for determining the next directional move.

USD/JPY: Sub-155 Territory Signals Yen Strength

The pair has dropped below 155.00 and is now trading around 154.65, reflecting growing expectations of a potential 75 basis point rate hike by the Bank of Japan on Friday. Such a move would represent a significant policy shift aimed at supporting the currency amid persistent inflationary pressures.

AUD/USD: Caught Between Dollar Weakness and Chinese Headwinds

While the broad dollar sell-off should theoretically support the Australian dollar, AUD/USD remains sluggish near 0.6630. This reflects disappointing economic data from China—Australia’s primary trading partner. November retail sales deteriorated sharply to 1.3% from the previous 2.9%, while industrial production disappointed at 4.8% annualized versus expectations of 5.0%.

For context, 40,000 USD converts to approximately 67,000-68,000 NZD at current exchange rates, highlighting the significant regional currency disparities in the Asia-Pacific zone.

Safe Haven Flows: Gold’s Bullish Resurrection

Gold exhibited classic safe-haven demand dynamics on Tuesday, initially dipping toward $4,270 in Asian trading before staging a impressive rebound. The combination of deteriorating US labor conditions and renewed inflation anxieties rekindled bullish interest, though the precious metal remains range-bound around the $4,300 level. This technical resistance will be critical for determining whether gold can extend its recent gains.

Key Takeaway: Watch the Macro Calendar

The dollar’s loss of ground reflects a fundamental reassessment of US economic resilience. With several central bank decisions and economic data releases scheduled for the remainder of the week, volatility is likely to remain elevated across major currency pairs.