The US Dollar rally stalled amid mixed speculation on interest rate cuts ahead of the release of US Nonfarm Payroll data.

The US dollar exchange rate showed mixed performance across major pairs in early New York session trading on Wednesday (6/December). The US Dollar Index (DXY) appeared to struggle to break the 104.00 threshold amid mixed speculation of interest rate cuts ahead of the release of US Nonfarm Payroll data.

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The attention of market participants has been focused on the euro since yesterday. The statement of an ECB official confirmed expectations of a faster Eurozone rate cut next year, so EUR/USD depreciated along with other euro crosses. In turn, this gave a lift to its main rival - the USD.

Market participants now expect the ECB not to change its policy at next week's meeting. Moreover, there is an 85% chance of an ECB rate cut by March 2024. The market has almost fully priced in gradual ECB rate cuts totaling 150 basis points over the next year.

The Federal Reserve is also unlikely to change interest rates at the FOMC meeting on December 12-13, 2023. However, traders are focusing more on interest rate speculation next year.

CME's FedWatch data suggests that market participants are already pricing a roughly 60% chance of a Fed rate cut starting in March. Moreover, the Fed's gradual rate cuts will likely total 125 basis points through 2024.

Some analysts think the Fed rate cut speculation is overblown. Therefore, the USD has the potential to continue its rally if US data hints at a more resilient economic situation, higher inflation, or a more hawkish Fed stance.

"Markets have gone a bit overboard with pricing in very aggressive path of rate cuts through next year," said Aninda Mitra, head of Asia macro and investment strategy at BNY Mellon Investment Management. "Our view is that Fed might hold off till the second quarter and even then the cuts would be a lot more shallower than what the market would like," Mitra said.

Unfortunately, the stability of recent US economic data has been shaky. US GDP data and US Nonmanufacturing PMI scores outperformed market forecasts, but Manufacturing PMI suffered a sustained contraction.

Tonight's ADP Nonfarm Employment Change report was also disappointing. ADP stated that the number of private payrolls only increased by 103k in November 2023, or missed the consensus estimate of 130k. The October data was also revised down from 113k to 106k.

Traders often regard the ADP report as a predictor of Nonfarm Payrolls, so there is concern ahead of the release of US Nonfarm Payroll data on Friday. It's also worth noting that two other NFP predictor data - the JOLTs Job Vacancies data and the employment sub-index in the Nonmanufacturing PMI - were missed yesterday, despite an overall increase in the US Nonmanufacturing PMI score.