The dollar sold off against most of its peers after the Federal Reserve fell short of delivering on market expectations for a "hawkish cut" last week.
In addition to restarting quantitative easing, communications emphasised labour market weakness rather than the continued failure to meet the inflation target. Markets focused on the divergence between the Fed and other central banks like the ECB, which has finished cutting and will likely hike next. The only major exception was the yen, which continues to be hobbled by fears of fiscal expansion. Notably, long-term US yields failed to benefit from the Fed's dovishness and ended the week significantly higher even as the dollar sold off, underscoring the difficult task ahead for the FOMC.
This week's central bank meetings should underscore the increasing divergence in monetary policy across the major economic areas. While the Fed continues to cut rates, the Bank of Japan is expected to hike on Friday. On Thursday, the ECB will hold rates and the Bank of England will cut. We’ll also see critical macroeconomic data releases out of the US, starting with the belated November labour report on Tuesday and ending with the November inflation report on Thursday. Amid the storm of news, we will pay close attention to long term rates, as market patience with inflationary policies seems to be wearing thin.
GBP
This week is shaping up to be a critical one for the pound. The Bank of England meeting on Thursday will be preceded by the October labour market report on Tuesday, the December flash PMIs of business activity (also on Tuesday) and the November inflation report on Wednesday. Expectations are for the same stagflationary combination that is making monetary policy unusually difficult, namely a labour market that continues to shed jobs and stubbornly high inflation significantly above the central bank's target.
We still expect another reduction to the base rate to 3.75% on Thursday, but it isn't clear when or even whether the Bank of England can continue its rate cutting cycle unless inflation starts trending decisively down. The vote on rates this week is likely to be another close one, highlighting the growing disparity of views among committee members. We also expect Bailey and co. to reiterate that any future cuts will be “gradual and careful” and certainly not set in stone.
EUR
Recent commentary by ECB officials, particularly Isabel Schnabel, confirms our view that the bank’s rate-cutting cycle is over and the next move is more likely to be a hike than a cut in rates. While it is far too early for the Governing Council to explicitly raise this as a possibility, we think that Thursday’s meeting will strike an upbeat tone on the growth outlook - Lagarde effectively confirmed last week that the growth forecasts would be raised on Thursday.
We expect this week's PMIs to support this hawkish messaging by confirming that the Eurozone's economy remains surprisingly resilient. As a result, the gap in short-term rates across the Atlantic is shrinking fast. This, combined with the emergence of Eurozone assets as an alternative to the US dollar should remain a tailwind for the common currency over the medium term.
USD
The fog over the state of the US economy should in large measure dissipate this week. The nonfarm payrolls report on Tuesday is expected to show a labour market that is still generating new jobs, contrary to Powell's downbeat comments at the Fed's post-meeting presser last week. The CPI report for November will actually cover two months of price increases, as the October data was cancelled for the first time in history.
While this week’s data is expected to show that no further progress has been made in bringing US inflation down to the Fed's target, the dispersion in predictions is unusually wide due to the uncertainty. As we had anticipated, last week’s “dot plot” of rate predictions showed just one further cut in 2026 and another in 2026, albeit the gap between the hawks and the doves has perhaps never been so large. By week's end we should have a much clearer idea of the state of the Fed's competing goals - low inflation and full employment - as we head into 2026.
Deep dives and expert insights:
- G10 currency market report - Get the latest analysis on major currencies.
- ECB December Meeting Preview
- FX Monthly - December 2025
