The US dollar confirmed last week that it remains a safe-haven currency of choice for investors during times of global conflict.
Maduro's capture, America’s seizure of unregistered oil tankers, Trump's threats on Denmark and the Iranian protests all contributed to a sense of anxiety and the dollar rallied against its peers. The December US payrolls report had little impact on markets, other than confirming that we are unlikely to see a Fed cut later this month. Yet, the dollar was under pressure again on Monday on the news that US prosecutors had opened a legal investigation into Fed Chair Powell over the scope of recent renovations to Fed buildings, which markets view as more of a politically motivated attack than a straightforward legal matter.
Aside from the ongoing Powell story, investors will focus on the critical US CPI inflation report for December on Tuesday. This week's number packs twice as much information as usual as the previous month's report was plagued by insufficient data due to the federal shutdown. While data from the Eurozone will be sparse, significant November economic data, particularly monthly GDP growth, is due out of the UK on Thursday.
GBP
The UK PMIs of business activity covering the month of December were revised lower from the initial estimates, and the general tone of the admittedly second tier data released last week was largely downbeat. Sterling underperformed somewhat relative to most other European currencies, particularly the euro, as the relief rally following November’s Autumn Budget appears to have now almost entirely evaporated.
A handful of critical economic data releases in the next couple of weeks could be key for the pound, as they are likely to be important in shaping expectations for Bank of England policy. Thursday’s monthly GDP data is seen showing no growth at all that, if confirmed, would raise fears of an outright contraction in Britain’s economy in the fourth quarter of last year. Next Tuesday’s labour report will arguably be of even greater significance, as this could tip the balance either in favour or against a March rate cut from the MPC. So far, investors are paring their bets on Bank of England cuts, and now expect less than two full 25bp moves in 2026. Relatively high rates should, we think, continue to support the pound this year.
EUR
Germany's troubled industrial sector saw some genuinely hopeful reports last week. November industrial production surprised to the upside, posting growth for the second straight month for the first time since May 2023. Even more surprising was a blowout number for factory orders (up 5.6% MoM vs. +1.0% estimate), which bodes well for future activity and may signal that the impact from last year’s massive infrastructure stimulus package is finally starting to be felt. As we’ve outlined in our 2026 Global Outlook, we see this as one of our main calls for the coming year.
With inflation seemingly under control in the Euro Area, the ECB is in a good place to keep rates steady throughout 2026. The progressive closing of the interest rate gap with the US and positive economic news should support the common currency over the next few weeks.
USD
The December employment report did not change in the least the narrative about the US labor market: steady growth and a “low fire, low hire” labour market. The most helpful data point was a tick down in the unemployment rate, which unexpectedly fell to 4.4% (from 4.6%). This confirms that this unusual economy is nowhere near a traditional recession. This week's inflation data is perhaps the most important report in months. Much of the consensus around the path of Federal Reserve cuts has been built on the expectations that inflation is headed down, however gently, and needs to be confirmed by this week's data.
Investors will, of course, also be keeping abreast of the news surrounding the Powell legal challenge. With Powell’s term set to end soon, and following Trump’s incessant verbal attacks, this seems more about leverage than any clear evidence of criminality, and even some Republicans have expressed their concerns. The broader fear is that the move could continue to erode Fed autonomy, which may raise long-term inflation expectations and be bearish for the greenback.
Deep dives and expert insights:
- G10 currency market report - Get the latest analysis on major currencies.
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- G10 FX Outlook - December 2025
