USD: The Payrolls & Tariff Catalysts - Tactical Setup for Fateful Friday

Today's dual events present a classic binary setup for the dollar. The payrolls data will likely confirm a stable labor market, reinforcing the Fed pause, while the tariff ruling introduces high uncertainty that could drive the dollar lower. The market's direction hinges on which catalyst wins the day.

The consensus forecast for December nonfarm payrolls sits at 70k, up from the 64k increase in last month's report. Economists are watching the unemployment rate, expected to ease to 4.5% from 4.6%, as a key signal for the Fed. A print in line with consensus would solidify the view of a resilient job market, further sidelining any near-term rate cut expectations. In fact, the March meeting is already priced at a little less than a 50% probability for a cut, a forward curve supportive for the dollar. The dollar's weak start to 2026, having its worst annual performance since 2017, suggests the market is already pricing in some of this stability, leaving limited upside from a "good" payrolls number.

The real wildcard is the Supreme Court. The court is scheduled to rule on the legality of Trump's tariffs, a decision that could come down today. The odds favor a negative outcome, with Polymarket pricing a ruling that declares the tariffs unlawful at 77%. Treasury Secretary Scott Bessent himself expects a "mishmash" ruling, indicating the decision may be complex and legally ambiguous. Even if the court finds the tariffs unlawful, the administration has other tools to reinstate them, but the process adds significant uncertainty. This ruling introduces a potent headwind for the dollar, as it could signal a retreat from aggressive trade policy and raise questions about the sustainability of tariff revenues that have bolstered the U.S. fiscal position.

The bottom line is a clear tension. Payrolls data offers a relatively clean, data-driven signal that the dollar can ride. The tariff ruling, however, injects a wave of policy uncertainty that could quickly overwhelm any positive economic data. For now, the setup favors the dollar on the payrolls front, but the tariff catalyst has the potential to flip the script entirely.

Payrolls: Confirming the Pause (Entry/Exit Levels)

The immediate market reaction to today's payrolls print will be binary. A number in line with consensus confirms the stable labor market the Fed is watching, reinforcing the pause. A miss, however, could trigger a re-evaluation of that stance.

The consensus forecast is for a 70k increase in December nonfarm payrolls, up from the 64k increase in last month's report. More importantly, the unemployment rate is expected to ease to 4.5% from 4.6%. This combination is the sweet spot for the Fed. It signals resilience without overheating, which is exactly what the market is pricing. The forward curve now shows the March meeting priced at a little less than a 50% probability for a 25bp cut. A solid payrolls print would fully rule out a January move and keep that March cut probability below 50%, supporting the dollar.

For traders, the key levels are clear. The DXY index faces immediate resistance at the 100 level. A print significantly stronger than 70k could push it higher, but the market has already priced in stability. The real risk for the dollar is a miss. A reading below 60k would be a significant negative surprise, potentially reigniting concerns about economic momentum and pressuring the dollar lower. Given the whisper number has risen to 65k, the market is braced for a modest beat, but not a blowout.

The bottom line is tactical. The payrolls data offers a clean, data-driven signal that the dollar can ride. It's unlikely to spark a major rally from here, but it will provide the catalyst to confirm the current pause. The real event, the tariff ruling, now looms as the wildcard that could quickly flip the script.

Tariff Ruling: The Wildcard for Dollar Weakness

The Supreme Court's decision on the tariffs is the true wildcard for the dollar. With the court scheduled for an "Opinion Day," a ruling is highly probable. The odds are stacked against the administration, with prediction markets pricing a ruling that declares the tariffs unlawful at 77%. Treasury Secretary Scott Bessent himself expects a "mishmash" ruling, signaling the decision may be legally complex and ambiguous rather than a clean win or loss.

This ruling is a direct catalyst for trade policy uncertainty. The court's choice will determine not just the legality of the tariffs, but also whether the U.S. must reimburse importers who have already paid. Even if the administration finds workarounds-Bessent notes at least three other options exist-the process adds significant friction. For the dollar, this introduces a potent headwind. The tariffs have been a key source of fiscal revenue, and their potential removal or limitation raises questions about the sustainability of that income stream, which has bolstered the U.S. fiscal position. The market's reaction will hinge on the decision's nuance: a narrow scope or limited future application could be less damaging than a full reversal.

The technical setup reflects this risk. The dollar faces immediate support at key levels. The euro is supported at 1.1600, while the yen finds a floor at 156.91. A ruling against the tariffs would likely trigger a dollar sell-off, testing these levels. The bottom line is that the tariff ruling has the potential to flip the script entirely. While payrolls data offers a clean signal to ride, this decision injects a wave of policy uncertainty that could quickly overwhelm any positive economic data, creating a tactical opportunity for a dollar move lower.

Catalysts and Risks: What to Watch

The immediate next steps are clear. First, watch the payrolls print. A number in line with the consensus forecast of 70k will confirm the stable labor market the Fed is monitoring, fully ruling out a January rate cut. The real risk is a miss. A print below 60k would be a significant negative surprise, potentially reigniting concerns about economic momentum and pressuring the dollar lower. The whisper number has risen to 65k, so the market is braced for a modest beat, but not a blowout.

Second, monitor the Supreme Court ruling. This is the high-impact, binary event with market-moving potential. With Polymarket pricing a ruling that declares the tariffs unlawful at 77%, the odds favor a negative outcome for the administration. Even if the court finds the tariffs unlawful, the administration has other tools to reinstate them, but the process adds significant uncertainty. This decision injects a potent headwind for the dollar, as it could signal a retreat from aggressive trade policy and raise questions about the sustainability of tariff revenues that have bolstered the U.S. fiscal position.

Finally, keep an eye on the Canadian dollar. The WTI-WCS spread has widened to $15 in the past few days, the widest in a year. This reflects growing concerns about Canadian oil exports, potentially from a Venezuelan crude supply increase. For the CAD, this adds pressure at a time when Canada's own labor data is less optimistic. The Bank of Canada would start to worry if unemployment re-approaches the 7.0% mark, and with inflation not showing worrying signs, the path for a rate hike now looks to be delayed until at least 2027. A return to the 1.39-1.40 area seems likely.