The Dollar Index (DXY) found support at 98.000 following November’s weak payrolls report, which confirmed ongoing labor market softness but was not weak enough to prompt an early Fed rate cut. Markets now look to March or April for potential easing, while Fed Governor Christopher Waller emphasized a gradual approach to returning policy to neutral, MUFG's FX analyst Lee Hardman reports.

Fed plans to keep rates on hold in January

"The dollar index has found support at the 98.000-level after attempting and failing to break below after the release of the weak nonfarm payrolls report for November. While the report provided further evidence that labour demand remained weak and the US labour market continues to loosen, it has been judged as not weak enough to alter the Fed’s current plans to leave rates on hold at the next FOMC meeting in January."

"US rate market pricing for the January FOMC meeting has remained largely unchanged with only around 7bps of cuts priced in. The next Fed cut is not expected until the March or April FOMC meetings. A slower pace of Fed cuts at the start of next year would help to provide more support for the US dollar at a time when the US economy is expected to strengthen driven by a bounce back in activity following the record US government shutdown in Q4 and the boost to growth from stimulus kicking in from President Trump’s One Big Beautiful Bill."

"Dovish Fed Governor Christopher Waller, who is still reportedly in the race to become the next Fed Chair, made the case yesterday for further rate cuts. He stated that current monetary policy settings are up to 100bps above neutral. He favours 'steadily' bringing the policy rate down to neutral. He emphasized though that with inflation still above target, the Fed can take it’s time to lower rates, and there’s 'no rush to get down'. The 'very soft' labour market with close to zero jobs growth provides justification to lower the policy rate to neutral."