USD: Liquidity boost and trade risks keep pressure on the greenback

Risk appetite is returning, with the S&P 500 on a rare seven month winning streak and liquidity now leaning in the same direction. The Federal Reserve has formally closed the book on Quantitative Tightening from 1 December and injected around $13.5bn into the system via overnight repos, the second largest operation since the pandemic and larger than those seen around the Dot Com period, keeping the financial system well supplied for further risk taking.

The macro picture is less upbeat. Markets are firmly pricing a December rate cut, encouraged by softer ISM readings and a Beige Book that points to uneven activity and a cooling labour market. Seasonals are not on the dollar’s side either, with the broad index having fallen in eight of the past ten Decembers, while easing geopolitical tension has blunted its safe haven appeal.

Further out, trade and legal risks complicate the outlook. However the Supreme Court rules on presidential tariff powers, the result looks unhelpful for the long end of the curve, either through stickier inflation or larger deficits and heavier issuance. That leaves Treasuries wrestling with the tension between hopes for a more dovish Fed in 2026 and the fiscal reality of persistent borrowing needs, implying that higher long term yields may still be needed to attract buyers. For the dollar, a steeper curve, worries about inflation and renewed focus on political interference at the central bank are a clear drag. Today’s US calendar brings the November ADP report, expected near 10k after 42k, and the ISM services survey, with the employment component last at 48. These should not meaningfully challenge the roughly 92% probability of a 25bp cut next week, and a clean move below 99.00 on DXY would likely unlock further bearish momentum as the currency continues to catch up with lower short dated yields.

GBP: Sterling held up by weaker dollar rather than domestic strength

Sterling is soft against most G10 currencies this week, underlining how the post Budget uplift has faded. The exception is the US dollar, where broad based dollar weakness has allowed GBP/USD to hold above 1.32 even as the pound underperforms elsewhere.

Positioning and December’s usually supportive seasonality give sterling bulls a potential path towards 1.34, but any sustained push higher still looks heavily dependent on the broader dollar trend. If US weakness fades as 2026 approaches, sterling’s gains are likely to struggle.

Technically, the 21 day moving average in GBP/USD is edging higher, consistent with a modest near term upside bias. The route to 1.34 is, however, crowded with resistance as several key moving averages cluster overhead, reinforcing the view that dollar dynamics, rather than UK specific news, are driving price action. On the policy side, the Budget’s freeze on fuel duty and measures that lower household energy bills introduce a disinflationary tilt and keep the door open for a December BoE cut, reinforcing expectations of a more dovish profile into 2026 at a time when growth and yield differentials are set to dominate G10 FX performance.

EUR: Peace headlines, inflation and technicals underpin the single currency

Witkoff’s arrival in Moscow to discuss a revised Ukraine peace framework has kept markets cautiously hopeful that talks are moving in a more constructive direction, with President Zelenskyy calling the proposal “better now” and President Putin signalling some openness last week. Progress remains tentative. Putin has not moderated Russian demands and is claiming advances in Donetsk that Kyiv disputes, underlining his insistence that Ukraine cede the region and raising questions over how quickly any deal can be reached. Even so, credible signs of progress that lower energy risk would support the euro and other higher beta European currencies through the lower oil price channel.

On the data side, eurozone headline CPI printed at 2.2% year on year versus 2.1% expected, with core steady at 2.4%. The upside surprise mainly reflected a less negative contribution from energy. While the medium term trend in inflation still points lower, this release does not create any urgency for further ECB easing, which helps explain the subdued FX reaction.

The euro was broadly flat against the dollar on Tuesday, but has since pushed above resistance around 1.1630 on the back of broad dollar weakness. A sustained close above the 50 and 100 day moving averages at 1.1611 and 1.1644 would confirm a short term bullish signal and open the door to further gains. In the near term, US data such as industrial production and labour market releases could give EUR/USD an extra shove towards the 1.1655-1.1670 area. A clear break of that zone, especially on softer US numbers, would make a move through 1.17 more likely. We retain a year end target of 1.18. Politically, the focus in Europe remains on Ukraine funding, in particular the European Commission proposal to use frozen Russian assets as collateral. Failure to secure this package, whether due to Belgian reluctance to deploy assets held at Euroclear or Hungarian opposition to further support, would weaken Kyiv’s negotiating position and could weigh on the euro at the margin.

Looking ahead

Near term FX moves are likely to be driven by incoming US data and central bank communication. For the dollar, the combination of softer domestic releases, seasonal weakness and complex trade related risks argues for a cautious stance, especially if Chair Powell validates market pricing for a lower terminal rate. Sterling will continue to take its cue from the dollar and from how quickly the BoE leans into the disinflationary impact of recent Budget measures. For the euro, incremental progress on Ukraine and confirmation that inflation can drift lower without forcing immediate ECB action should keep dips attractive as long as US yields remain contained.