US Dollar softens to third straight weekly drop as traders assess Fed outlook

Here is what you need to know on Friday, December 12:

The US Dollar remains on the defensive and heads for its third straight weekly decline on Friday. The prospect of the US Federal Reserve (Fed) rate cuts next year continues to undermine the USD against its six major currency rivals. Traders brace for the Fedspeak later on Friday for more clues about the US interest rate path. Cleveland Fed President Beth Hammack and Chicago Fed President Austan Goolsbee are scheduled to speak.  

Data released by the US Department of Labor (DOL) on Thursday showed that the number of Americans filing for new unemployment benefits increased to 236,000 in the week ending December 6. The figure came in above the market consensus of 220,000 and was higher than the previous week of 192,000 (revised from 191,000). This reading registered the biggest increase since mid-July 2021. 

The US central bank decided to cut rates by 25 basis points (bps) in a split vote at its December policy meeting on Wednesday, putting it in a range of 3.50% to 3.75%. Two Fed officials voted to keep the rate unchanged, while Stephen Miran, whom Trump appointed in September, voted for a larger rate cut. The Fed’s economic projections suggested one rate cut will take place next year, although new data could change this.

Markets are currently pricing in nearly a 75% probability that the Fed will hold interest rates steady next month, compared with a 70% chance just before the rate cut announcement, according to the CME FedWatch tool.

AUD/USD trades in a narrow trading range above the mid-0.6600s after reaching a fresh three-month high at 0.6686 on Wednesday. The pair struggles to gain ground after the release of the weaker-than-expected Australian employment data for November. 

USD/JPY recovers some lost ground to above 155.75 as the prevalent risk-on environment undermines the Japanese Yen (JPY). The Bank of Japan (BoJ) interest rate decision will be in the spotlight next week. According to a December 2-9 Reuters poll, 90% of economists expected the Japanese central bank to raise short-term interest rates to 0.75% from 0.50% at the December meeting. This is a significant increase over the last Reuters survey conducted last month, which only had 53%.

EUR/USD holds steady near 1.1740 after hitting an eight-week high on Thursday. The final reading of the German Harmonized Index of Consumer Prices came in line with market consensus, rising 2.6% YoY in November, unchanged from the prior 2.6%.

GBP/USD edges lower to around 1.3375 following the weaker UK Gross Domestic Product (GDP) report. The UK GDP unexpectedly fell by 0.1% in October, compared to a 0.1% drop reported in September, the Office for National Statistics (ONS) showed on Friday. The market consensus was for a 0.1% expansion in the same period.

Gold remains close to its highest level since October 21, around $4,280. Silver rises to near $63.80 and is poised to retest its all-time high during the early European trading hours on Friday.