Markets are focused on US macro data and Federal Reserve (Fed) communications, with November's Nonfarm Payrolls (NFP) data expected to show weak job growth and a higher unemployment rate.

Weaker data or a dovish Fed signal could revive expectations of a March interest rate cut, while Thursday's European Central Bank (ECB) meeting remains the main external risk for short US Dollar (USD) positions, notes ING FX analyst Chris Turner.

Fed speakers could reinforce the dovish bias

"In terms of US domestic news this week, the focus will be on major data releases and key Fed speeches. The highlight will be tomorrow's November nonfarm payrolls (NFP) release. A weak figure of +50,000 is expected, plus the unemployment rate rising slightly to 4.5%.

Weaker-than-expected data could accelerate pricing in the next Fed rate cut. We think the Fed could cut rates again in March, which is currently only priced at a 33% probability."

"We're also interested in key Fed speeches, and in particular whether key figures see room for further rate cuts. We'll hear a speech from New York Fed President John Williams at 4:30 PM CET today. He was influential in shifting market expectations toward dovish policy ahead of last week's Fed rate cut. And on Wednesday, we'll hear a speech on the economic outlook from Chris Waller – he has been a very influential voice at the Fed over the past few years."

"The biggest threat to dollar shorts from abroad may come from Thursday's European Central Bank interest rate meeting, if eurozone growth forecasts are not revised up enough or President Christine Lagarde rejects the idea of ​​an ECB rate hike in 2026. For today, the DXY may consolidate in the 98.00-98.50 range." (alg)

Source: FXstreet