USD: A cautious Federal Reserve and muted seasonality

As December gets underway, attention centres on the Federal Reserve’s tone at the upcoming meeting and on whether typical year-end pressure on the dollar will materialise. The policy decision itself is largely priced in, which means the guidance that follows is likely to be the main catalyst for FX moves. Recent cuts have been paired with language that leans toward caution, which has helped the dollar retain support. With expectations for another cut now close to fully discounted and economic data still inconsistent, the meeting risks turning into another positive moment for the currency.

Speculation over the next Fed chair continues, with markets debating how dovish the preferred candidate might be. Although this is primarily a story for 2026, the prospect of a softer policy stance reduces enthusiasm for fresh dollar upside unless stronger domestic catalysts appear.

Seasonality is usually dollar-negative in December, driven by portfolio adjustments out of typically winning US assets. This year may prove different. US markets have already faced various setbacks, including tariff uncertainty and recent equity weakness. In addition, many investors hedged previously unhedged exposures earlier in the year during sharp bouts of dollar weakness. That reduces the likelihood of large seasonal flows weighing on the currency now.

Technical factors remain in control for the time being. The trend is still defined by higher highs and higher lows, with support seen around 99.400. With much of the expected December easing already in the price, new US macro releases will be required to shift sentiment. ISM, ADP and PCE figures will be key this week.

GBP: A vulnerable pound despite brief stabilisation

Sterling opened the week on the back foot as risk appetite faded, reinforcing our view that recent gains following the Budget were more of a relief bounce than the start of a stronger trend. Investors welcomed Chancellor Reeves’ emphasis on fiscal restraint, reflected in the reaction across gilts and FX markets. However, the wider political backdrop remains unsettled, with calls for Reeves to step down after claims she misrepresented the UK fiscal position.

Expectations for a Bank of England cut in December have grown, and markets have moved forward the likely timing of a subsequent cut to May. This shift in pricing has eroded the pound’s yield advantage, and last week GBP/USD stalled at the 200-day EMA near 1.3270. Sterling’s initial lift therefore still looks tactical rather than structural.

Domestic challenges are becoming more obvious. Sterling’s underperformance in the second half of the year reflects the UK’s weak economic environment and persistent fiscal concerns. The roughly six per cent slide in GBP/EUR underlines how home-grown pressures have weighed on the pound more heavily than external factors. The correlation between EUR/USD and GBP/USD has fallen to its lowest level in around four years, which signals how independent sterling’s difficulties have become.

Still, the pound avoided a seventh consecutive monthly decline against the euro, suggesting momentum may be stabilising. Seasonal trends for December are also favourable, although they typically depend on broad strength in risk assets. With no major UK data releases this week, attention will fall on Bank of England speakers Dinghra and Mann, whose views could influence rate expectations.

EUR: Mixed inflation picture and geopolitical influence

Eurozone inflation data at the end of last week painted a varied picture. France and Italy recorded softer results, while Spain and Germany saw firmer figures. Germany stood out with inflation rising to 2.6 per cent in November, the highest in nine months. The bloc-wide reading due on Tuesday is expected to offer a clearer signal but is still likely to remain close to the two per cent mark.

The broader backdrop continues to point toward steady European Central Bank policy for now, limiting the immediate FX impact. Instead, geopolitical developments may carry greater weight in the near term. Discussions between US and Ukrainian negotiators over the weekend appeared constructive, and the visit of US special envoy Steve Witkoff to Russia is expected to continue the dialogue. Any sign that progress is achievable, especially given President Putin’s recent comments on revisiting a peace proposal, could be supportive for the euro.

We expect EUR/USD to continue trading within its recent range. Support stands near 1.15 and resistance at 1.1620 to 1.1630. Breaking through the upper bound likely requires either notable progress on geopolitical talks or a clear miss in US data.

Looking ahead

The final month of the year opens with the dollar supported by cautious monetary signals and potentially weaker seasonal flows than usual. Sterling remains vulnerable to domestic uncertainty and shifting Bank of England expectations, although seasonal patterns offer some hope. The euro continues to trade around familiar levels, with geopolitics acting as a possible swing factor.

Upcoming US data and the Federal Reserve’s messaging look set to dictate market behaviour across the major currencies in the days ahead.