USD: Fed repricing keeps dollar supported

US rates moved higher after comments from the ECB’s Isabel Schnabel led investors to question why markets still price a sizeable Fed easing cycle next year. Fed funds futures for late 2026 sold off and the implied 2025 peak has risen by roughly 20bp to just above 3.10%, weighing on US growth stocks as discount rates rose.

Focus today is on JOLTS vacancies, ADP jobs and the NFIB survey in the run-up to tomorrow’s FOMC decision. The latest data are unlikely to change this week’s outcome, but stronger numbers could see further paring of rate cut expectations and keep the dollar bid. DXY could edge towards 99.30, while USD/JPY remains in focus, with a move through 156.10/20 potentially opening 157.00/20 into next week’s BoJ meeting.

GBP: Budget relief, but risks under the surface

Sterling has enjoyed some relief since the November budget, with GBP/USD up more than 1% as investors unwound risk premia at the long end of the gilt curve. The lack of surprises encouraged some short covering, leaving 1.33 as a fragile support ahead of the Fed. For now, a 1.33 to 1.3350 range looks reasonable, with a hawkish Powell likely to push cable lower.

A survey from REC, KPMG and S&P Global showed firmer wage growth in November despite a soft labour backdrop, briefly trimming expectations of a near-term Bank of England cut. Persistent pay pressure suggests inflation may not fade quickly, keeping the MPC divided and capping sterling. Next week’s labour market and inflation data will be key; another soft CPI print could pave the way for a more dovish tilt and a more durable break below 1.33.

EUR: Higher rates, better fundamentals, lingering risks

Schnabel’s hawkish rhetoric lifted short-dated euro yields but provided little help to the currency, with EUR/USD ending slightly lower as markets focused on a reassessment of Fed easing. Our rates team sees scope for further curve steepening in the eurozone, with Dutch pension reform in early 2026 likely to inject volatility into the long end.

The backdrop for the euro is tentatively improving as energy prices fall and German fiscal support, including a sizeable military spending package, feeds into the outlook for 2026. Political risk, however, remains a constraint. A failure of the French social security budget vote could see EUR/USD slip towards 1.1585/90. For now, the pair is holding a 1.1640/30 to 1.1670 range, with brief overshoots possible on either side depending on US data. Continued divisions over eastern Ukraine, highlighted by President Zelenskiy, also limit enthusiasm for a sustained euro rally.

Looking ahead

In the near term, US labour indicators and the Fed decision will set the tone. Any suggestion that next year’s cuts will be shallower than priced should keep the dollar supported. The BoJ meeting next week adds an extra driver for USD/JPY and broader risk sentiment.

In Europe, French fiscal developments and the execution of German stimulus will shape the euro story, while UK labour and inflation data will dictate how quickly the Bank of England can pivot. Political and geopolitical headlines around France and Ukraine remain important swing factors for EUR and GBP.