USD: Risk of a stronger dollar on a hawkish cut

Markets go into tonight’s FOMC decision heavily positioned for further easing, with three cuts priced between now and the end of 2026, including the widely expected 25bp move this evening that would take the target range to 3.50-3.75%. The focus will fall on the Summary of Economic Projections, the number of dissenters and Chair Powell’s press conference. Leading market analysts are forecasting anywhere from one to four dissenters compared with one in October, and see the Fed pencilling in between one and two cuts in 2026, reflecting a mixed range of expectations. Growth and labour market projections are likely to be scrutinised, with scope for GDP to be revised higher and unemployment nudged up from the September projections.

The Fed is now much closer to neutral, and a more vocal minority on the Committee could argue for pausing cuts until the data outlook becomes clearer. Powell’s October press conference triggered a sharp dollar rally, and similar communication today, stressing that three consecutive cuts have already delivered substantial easing, could again favour the dollar. DXY could push towards 99.60 on a so-called hawkish cut, especially as investors reassess global central bank policy in a more cautious light. While markets still appear confident that the likely appointment of Kevin Hassett as the next Fed president will cap the cycle with a terminal rate near 3%, it may be difficult to extract much in the way of dovish messaging from today’s communication. Only a decision to increase Treasury bill purchases beyond what is needed to roll maturities, which would be a technical step to stabilise the balance sheet relative to GDP, might be interpreted as slightly dollar negative. Any dollar strength today, however, may prove short lived if soft jobs data next week and usual December seasonality reassert downward pressure on the currency.

EUR: Euro sensitive to US rates, French politics and Ukraine funding debate

EUR/USD briefly slipped yesterday after stronger-than-expected October JOLTS job openings, approaching support near 1.1620 before settling back into the 1.1630-1.1670 range once softer details of the report were absorbed. The cross continues to trade largely on the dollar leg of the 2-year rate differential, with the euro side gaining little traction despite recent ECB commentary. In our view, euro upside driven by local rates will struggle to gain credibility until incoming US data confirm the softer Fed path that markets continue to price. Since the US government shutdown at the start of October, EUR/USD has tracked rate differentials less faithfully, suggesting that the USD leg, as a proxy for Fed expectations, has lost some of its FX impact.

For today, we see scope for EUR/USD to retest 1.16 if the Fed delivers the expected cut alongside a more explicit signal of a pause at the January meeting, once the data backdrop is clearer. One-week implied volatility has risen to its highest level since September and now spans next Tuesday’s November jobs report, reinforcing the message that markets are looking beyond tonight’s decision for firmer macro evidence. On the domestic front, French Prime Minister Lecornu’s narrow success in passing the 2026 social security budget has reduced near-term political stress, but a contentious main budget vote still looms before year end and keeps French politics as a latent negative for the euro. At the European level, the debate over using emergency powers to freeze around EUR210bn of Russian assets to fund loans for Ukraine has raised questions among some asset managers about property rights and the euro’s perceived safe-haven status. Thus far, flow data show no clear sign of damage, and as long as the ECB is not drawn into directly backstopping Ukraine financing, we do not expect this issue to become a decisive headwind for the currency.

GBP: Sterling range bound before key UK data and BoE meeting

Sterling’s most interesting expression in the near term looks to be against the euro, where the extent of any dovish shift by the Bank of England over the next 10 days should be most clearly reflected. GBP/EUR remains locked between resistance at 1.1460 and support at 1.1420, and that range is likely to hold through Friday’s industrial production and monthly GDP releases. GBP/USD is also trading sideways in a 1.3300-1.3350 band, although tonight’s Fed outcome could see cable break lower if the dollar rallies on a hawkish message.

Yesterday’s testimony by Monetary Policy Committee members to Parliament’s Treasury Committee underscored growing divisions. Ramsden indicated that the case for rate cuts is stronger now than in November, while Dhingra reiterated concerns about lingering softness in the labour market. Mann struck a more balanced tone, pointing to both upside inflation risks and labour market fragility, whereas Lombardelli sounded more hawkish, highlighting the danger of inflation persistence. A tight BoE vote next week looks likely, with Governor Bailey expected to provide the casting signal on how quickly the Committee is prepared to pivot toward easing.

Looking ahead

In the very short term, price action will be driven by the interaction between tonight’s Fed message and elevated front-end volatility in EUR/USD, with scope for a stronger dollar if the Committee pushes back against the scale of easing priced for 2026. For sterling, next week’s UK labour market and inflation data, followed by the BoE meeting, will be crucial in deciding whether GBP/EUR can break out of its tight range and whether GBP/USD can withstand any renewed dollar strength. In Europe, the combination of French fiscal politics and the evolving EU framework for Ukraine funding will remain background risks, but the euro’s direction is still likely to be set primarily by the US data cycle and the market’s evolving view of the Fed’s end-point and pace of cuts.