Since the full flow of US economic data has not yet been restored after the shutdown, currency markets are focusing on the Federal Reserve.
In addition to the cut priced in for this week’s meeting, Trump hinted that political loyalist and ultra-dove Kevin Hassett seems to be getting the nod to be the next appointee to lead the US central bank. Unsurprisingly, the dollar sold off against all its G10 peers except the Swiss franc. The franc ended at the bottom of the table as investors traded away from safe havens and into risk assets. The biggest losses among major currencies were seen in the Brazilian real, as markets saw lower chances of a market-friendly administration following Bolsonaro's decision to endorse his son for president.
This week, markets will fully focus on the last Federal Reserve meeting of 2025 on Wednesday. Another cut in overnight rates, to 3.75%, is completely priced in by markets and we do not expect the Fed to surprise them. However, uncertainty about the Fed's tone of communications is much greater. The dot plot conveying each voting member's view of the likely path for rates will be key, and a "hawkish cut" could send the dollar back up to the top of its recent range. US labour data (JOLTS on Tuesday, weekly jobless claims on Thursday) and a slew of October data from the UK on Friday will round out the week.
GBP
Sterling continues to rally on relief about the recent UK budget, and mildly positive revisions to the PMIs last week, which suggested that Britain’s economy was not slowing to the extent that market participants had feared. This no doubt helped the pound end the week ahead of all of its European peers as well as the dollar.
Market expectations for Bank of England rates (at most two further cuts with a terminal rate in the mid-3s) appear roughly correct to us. With the UK economy showing signs of slowing, the jobs market remaining fragile and inflation finally dropping from its highs, we think that another cut is almost a certainty next week. But, the key will be the voting split among the committee and bank’s communications on future easing. The combination of relatively high rates, modest economic growth and a dovish Federal Reserve should keep the wind at the back of the pound in the coming months.
EUR
An upward surprise in the Eurozone inflation report for November supports our view that the ECB cutting cycle has come to an end and that the next move in rates is more likely to be up than down. A positive revision to the November PMI numbers further confirms his prediction, as it removes pressure on the central bank to provide further monetary stimulus. The composite PMI is now sitting at a pretty healthy 52.8, which is not only comfortably in expansion territory, but its highest level in two-and-a-half years.
As with the Bank of England, we will have to wait until next week for the final European Central Bank meeting of the year. There will be no change in policy, and we expect Lagarde to suggest to markets that there is practically no appetite at all for any further reductions in the policy rates. As the gap in rates across the Atlantic continues to close, we expect the common currency to remain well supported into 2026.
USD
The latest US labour market data continues to send mixed signals. The official data is relatively positive, if lagged because of the shutdown. Weekly jobless claims fell to a new post-Covid low last week. However, private data shows a more negative picture. At any rate, the data shows no sign of a recession, and the AI investment boom continues to underpin the US economy.
We think the market may be getting ahead of itself by pricing in Fed cuts for 2026, and the FOMC dot plot and general communications this week may start hinting in that direction. The committee's voting rotation will install four regional bank presidents, three of whom we expect to be rather hawkish. An obviously political loyalist like Hassett will have a difficult time building consensus, and we expect the Fed meetings to turn increasingly heated and riven by dissent as the months go by.
Deep dives and expert insights:
- G10 currency market report - Get the latest analysis on major currencies.
- FOMC December Meeting Preview
- FX Monthly - December 2025
- Global Trade Update - December 2025
- Webinar | 2025 Closing Bell :The Fed's final act - Register Now!
