Dollar Selloff Deepens as Labor Market Shows Cracks—What's Next for Major Pairs?

The Dollar’s Week of Weakness: What the Numbers Tell Us

The US Dollar Index tumbled below the 98.00 level on Tuesday, marking its weakest performance since mid-October. This retreat wasn’t random—it stemmed from a disappointing labor report that exposed significant cracks in the employment data, combined with mounting inflation concerns that shifted market sentiment sharply bearish on greenback strength. The broad-based selling pressure suggests traders are reassessing their Federal Reserve rate expectations.

Currency Pair Deep Dive: Where Are We Trading?

EUR/USD: The Yield Gap Narrows

EUR/USD continues to hover around 1.1750, with the pair displaying surprising resilience despite German manufacturing languishing in contraction at 47.7. The driver here is the narrowing yield differential between the Federal Reserve and the European Central Bank—as rate expectations shift, the traditional advantage for dollar holders evaporates. This dynamic is key to watching the euro’s next move.

GBP/USD: Pivotal Week Ahead

Trading near 1.3430, Sterling faces critical event risk with the UK Consumer Price Index releasing on Wednesday, where markets expect a 0% monthly increase and 3.5% year-over-year growth for November. Traders should watch this closely; if CPI surprises, it could reshape expectations ahead of Thursday’s Bank of England monetary policy announcement. The currency pair’s reaction will depend heavily on whether the BoE signals rate cuts or holds ground.

USD/JPY: The 155.00 Barrier Falls

Breaking below 155.00, USD/JPY now trades near 154.65 as speculation mounts that Japan’s central bank will raise rates to 0.75% on Friday. This move would represent Tokyo’s effort to stabilize the yen amid persistent inflationary pressures. For traders tracking CAD exposure, it’s worth noting that 149 cad to usd comparisons provide context for overall dollar weakness across commodity-linked currencies, as the Canadian Dollar also benefits from this broader greenback retreat.

AUD/USD: Caught Between Two Headwinds

The Australian Dollar struggles near 0.6630, unable to capitalize on the dollar’s weakness. The culprit: disappointing economic data from China, Australia’s largest trading partner. November Retail Sales crashed to just 1.3% from the prior 2.9% and consensus estimate of 2.9%, while Industrial Production fell to 4.8% annualized from the expected 5% and previous 4.9%. This data weigh heavily on risk sentiment, limiting AUD upside despite USD weakness.

Gold’s Surprising Strength Amid Chaos

The precious metal dipped to near $4,270 during Asian hours Tuesday before surging higher as what traders dubbed a “perfect storm” took shape: cooling US labor market conditions combined with lingering inflation concerns reignited safe-haven demand. While gold remains anchored around the $4,300 level, the reversal signals that despite dollar weakness, hard assets retain their appeal in an uncertain macro environment.

The Bigger Picture: What Comes Next?

The week ahead presents critical data points and central bank decisions that will reshape currency positioning. With the Federal Reserve’s policy path uncertain following softer labor data, and with the Bank of Japan and Bank of England set to make moves, traders face a complex landscape. The dollar’s breakdown through key technical levels suggests that rate differentials—not economic strength—are now driving currency flows, and that’s a dynamic worth monitoring closely through the remainder of December.