The U.S. dollar traded higher Wednesday, climbing away from its lowest level since the start of October as traders contemplated the Federal Reserve’s interest rate path after soft labor market data. 

At 03:55 ET (08:55 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.4% higher to 98.200, after hitting its lowest level since the beginning of October earlier in the week.

The index is down over 9% this year, on track for its steepest annual decline since 2017.

Cooling U.S. labor market

Data released on Tuesday showed that U.S. nonfarm payrolls rose by 64,000 jobs in November, exceeding economists’ forecasts, but this followed a sharp 105,000 job loss in October and came with the unemployment rate climbing to 4.6%, the highest since 2021.

The figures pointed to a cooling labor market and blurred the outlook for Fed policy.

That said, “the combined release yesterday of October and November jobs data did not alter the Fed’s narrative that the risk to the U.S. labor market is on the downside,” said analysts at ING, in a note.

“While Chair Powell has said that data releases will be distorted by the government shutdown, he has also spent much time positioning the unemployment rate as the best read on the supply-demand imbalance in the US labor market. The 4.6% rate is now higher than the median rate (4.5%) expected by FOMC members for the end of 2025.”

Sterling slumps after soft inflation data

In Europe, GBP/USD slumped 0.8% to 1.3322 after the release of softer than expected U.K, inflation data lifted expectations of a rate cut by the Bank of England on Thursday.

Annual U.K. consumer price inflation rose 3.2% in November, a fall from 3.6% the prior month and the lowest figure in eight months

The BoE’s Monetary Policy Committee voted 5-4 to leave rates unchanged last month, and signs of falling prices could well swing what is still likely to be a tight vote in favor of easing monetary policy.

A cut of 25 basis points would bring borrowing costs down to 3.75% from 4%, the lowest rate since the beginning of February 2023.

EUR/USD traded 0.3% lower to 1.1717, with the single currency slipping slightly but remaining close to the 12-week high it touched in the previous session ahead of the policy decision from the European Central Bank later this week.

The November eurozone CPI release is due later in the session, but is unlikely to sway central bank policymakers from keeping interest rates at 2% for a fourth straight meeting on Thursday.

“Hawkish comments from the ECB’s Isabel Schabel really reverberated through FX and rates markets last week,” said analysts at ING. “Should she be exposed as a hawkish outlier on Thursday and eurozone growth forecasts be revised insufficiently higher, then the euro could get hit.”

Yen hands back gains ahead of BOJ

In Asia, USD/JPY gained 0.5% to 155.54, with the yen retreating ahead of the Bank of Japan’s policy decision later this week.

The central bank is widely expected to raise interest rates, as policymakers respond to signs of more durable inflation and improving wage growth.

A rate hike would mark another step away from Japan’s ultra-loose monetary stance and could provide support to the yen.

USD/CNY traded 0.1% higher to 7.0457, while AUD/USD slipped 0.2% to 0.6619, with equity weakness on Wall Street hitting risk sentiment.