The dynamic of stock markets may indicate that investors now prefer sitting on the sidelines. There are many reasons for it. The Nonfarm Payrolls report contained positive and negative signals. In November, the economy added 263,000 new jobs. The October reading was also revised up to 284,000. The unemployment rate stood at 3.7%. Such results do not indicate the start of a recession. So, this is a positive signal that fuels hopes for a soft landing.

However, the report also showed an acceleration in wages. The figure jumped to 5.1%, which turned out to be significantly higher than the forecast reading of 4.6%. It also surpassed the October indicator revised higher to 4.9%.

Given that the Fed’s top priority is to tame inflation, a further increase in wages is bad news for investors. Wage growth may force the central bank to stick to a hawkish stance for a longer period of time. Therefore, traders are unwilling to buy risky assets.

Besides, the Fed meeting is just around the corner. Currently, everyone is confident that the regulator will raise the interest rate. The main question is the size of a rate hike. Moreover, the highly anticipated inflation report will be released on December 13 ahead of the Fed meeting.

Until then, investors could only speculate about the possible scenarios. Besides, Fed officials will provide no speeches until the meeting. According to the FedWatch tool, the majority of traders expect a smaller rate hike in December.

Last week, Jerome Powell also admitted such a possibility. So, the ratio of investors who are betting on a 50 basis point rate increase and those factoring in a 75 basis point move still totals 4:1.

Expectations of a less hawkish move are bearish for the US dollar. In November, the US dollar index declined by about 5.1%, notching the worst monthly performance since September 2010. It has been dropping for the second week in a row due to the likelihood of a smaller rate hike. It lost 1.4% last week.

Today, at the start of the Asian session, the US dollar index was hovering near a 5-month low versus its rivals. It was falling across the board, trading at 104.5. Besides, in the Asia Pacific region, risk appetite improved amid the easing of some Covid restrictions in China.

So, the greenback is likely to remain in the downward channel. Today, it is trying to consolidate in the range of 104.1-104.6. However, it is unable to snap a losing streak. This is why it may continue to decline for the fourth session in a row.

As usual, the yen took advantage of a drop in the greenback last week. The dollar/yen pair was able to dip to a monthly low of 133.6. However, the second week of December may not be so successful for the yen.

Despite the weakness of the US dollar, it still is stronger than the yen thanks to the widening rate gap between the Fed and the BoJ. Even smaller rate hikes signal the continuation of the monetary tightening. At the same time, the Bank of Japan is strongly committed to an ultra-loose monetary policy.

For this reason, bulls managed to get the upper hand, pushing the pair to the price corridor of 134.1-135.4. Bears may regain ground if the pair decreases below the 134 level. This scenario looks extremely unlikely as the pair is persistently moving up, trading at 135.3.

However, the trajectory of the Aussie is mainly influenced by external factors, for instance, the news about the easing of some virus restrictions in China, rising oil prices, etc. While the greenback is consolidating in the narrow range ahead of the Fed meeting, the Australian dollar is growing.

In the Asian session, the Aussie rose to 0.6806, moving steadily in the bullish corridor of 0.6766-0.6854. Looking ahead, the US dollar is unlikely to rally given that the Fed is expected to undertake a less aggressive rate hike. If so, the Aussie could advance to new highs.

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00:00 INTRO
00:20 US AVERAGE HOURLY WAGE, YOY
01:21 US Federal Reserve System
02:37 USDX
03:44 USD/JPY
05:12 AUD/USD