Central Bank Expectations Reset the Tone (8-12 December)

Traders adjusted positioning before the Federal Reserve’s December decision and evaluated fresh signals from the ECB, BoE and BOJ.

Firmer expectations for U.S. rate cuts, upgraded Eurozone growth data, renewed fiscal clarity in the UK, and rising conviction in a BOJ move all influenced currency dynamics, while commodities and yields responded to softer labor indicators and ongoing supply shifts. 

Market Drivers & Catalysts

• Fed Cut Expectations Deepen: The dollar retreated for a second week as the probability of a 25-bp Federal Reserve cut next week climbed to 87%. Markets also project 2–3 additional moves next year, supported by jobless claims hitting a three-year low, rising November layoffs, and speculation that Kevin Hassett could replace Chair Powell in May, a shift viewed as opening the door to a more dovish stance.
• Eurozone Momentum Outpaces the U.S.: The euro hovered near $1.165, supported by widening policy divergence between the ECB and the Fed. Eurozone Q3 GDP was revised up to 0.3%, November’s HCOB PMI pointed to the strongest private-sector expansion since May 2023, and inflation inched up to 2.2%. Meanwhile, U.S. markets are pricing in a 90% chance of a Fed cut next week as labor data softens.
• UK Fiscal Credibility Lifts Sterling: Sterling surpassed $1.335, its highest level since late October, after the UK’s November services PMI was revised higher and Chancellor Reeves’ budget strengthened fiscal discipline. Market pricing shows a 90% chance of a 25-bp Fed cut, with the BoE internally divided ahead of its December 18 decision. The OECD projects two BoE cuts to 3.5% by June.
• Japan’s Policy Shift Gains Traction: The yen advanced through 155 per dollar, set for a second weekly gain as markets anticipate a BOJ rate hike in December. Key government figures aligned with PM Takaichi signaled openness to a move, while Governor Ueda and Finance Minister Katayama reinforced confidence in Japan’s inflation strategy. Traders expect one step this month and 1–2 more next year.

Currencies

U.S. Dollar

• The dollar index slipped below 99, logging a second weekly decline.
• Markets assign an 87% chance of a Fed cut next week, with 2–3 additional cuts expected in 2025.
• The currency weakened as speculation grew that Kevin Hassett could succeed Powell in May.
• Jobless claims reached a three-year low, although layoffs rose in November.
• Traders now await delayed PCE, spending, and income reports.

Euro

• The euro held close to $1.165, near its strongest level since mid-October.
• Eurozone Q3 GDP revised up to 0.3%; HCOB PMI signaled the fastest private-sector growth since May 2023.
• Inflation edged up to 2.2%; the ECB is expected to keep rates unchanged through 2026.
• U.S. markets price in a 90% probability of a 25-bp cut next week and additional easing next year.

British Pound

• Sterling traded above $1.335, its strongest level since late October.
• November services PMI was revised higher; Reeves’ budget improved fiscal credibility.
• Markets see a near-certain 25-bp Fed cut, with more easing expected next year.
• The BoE is split ahead of its December 18 decision; Governor Bailey is expected to cast the deciding vote.
• OECD forecasts two BoE cuts to 3.5% by June.

Japanese Yen

• The yen strengthened past 155 per dollar, on track for a second weekly gain.
• Government officials signaled openness to a December BOJ hike, though some remain cautious.
• Markets anticipate a move this month and 1–2 additional steps next year.
• Governor Ueda’s confidence in the outlook and Katayama’s support for BOJ strategy reinforced expectations.

Commodities

Gold: Gold traded near $4,220/oz as expectations for a Fed cut remained firm ahead of next week’s meeting. ADP reported a 32K drop in private payrolls, Challenger announced 71K November layoffs, and year-to-date cuts neared 1.17 million, all reinforcing easing expectations. Speculation around Kevin Hassett potentially replacing Powell added to this view. Markets now await the delayed September PCE release.

Silver: Silver held above $57/oz and traded near record highs, having doubled since the start of the year. Supply tightness and expectations for deeper Fed cuts supported the rally. ETFs added 200 tons on Tuesday, the highest level since 2022. London saw record inflows, Shanghai inventories hit a 10-year low, and soft U.S. labor data reinforced easing expectations. Hassett’s potential appointment also fed speculation about more aggressive policy.

Fixed Income

U.S. 10-Year Treasury

• Yield held near 4.09% on Friday.
• Markets price an 87% probability of a 25-bp cut next week and expect 2–3 more in 2025.
• Speculation around Hassett replacing Powell strengthened dovish expectations.
• November layoffs totaled 71,321, while jobless claims hit a three-year low.
• Focus now shifts to delayed PCE inflation, spending, and income data.

UK 10-Year Gilt

• Yields were stable near 4.45% after early-December volatility.
• Reeves’ budget eased pressure in the gilt market.
• Investors positioned ahead of expected rate cuts in the U.S. and UK.
• Even with a 1-point rise, demand is expected to stay firm; the budget’s deflationary impact may support BoE easing.
• Traders expect a 25-bp BoE cut, though the result is likely to be narrow.
• U.S. markets fully price a third Fed cut and anticipate at least two more in 2026.

Japan 10-Year Government Bond

• Yield reached 1.94% on Friday, the highest since 2007.
• Expectations strengthened for a BOJ hike this month, with 1–2 additional steps projected for 2026.
• Government figures broadly signaled acceptance of a December move.
• Ueda reaffirmed confidence in the economy and the 2% inflation target.

Germany 10-Year Bund

• Yield stayed just below 2.7% as investors balanced mixed data.
• October retail sales fell 0.3%; November inflation held at 2.3%.
• EU-harmonized inflation rose to 2.6%, above the ECB’s target.
• ECB minutes signaled no urgency to ease, keeping 2026 expectations unchanged.
• Germany’s 2026 budget leaned more heavily on borrowing.
• In the U.S., markets anticipate a third Fed cut in December.

Economic Data Highlights

ADP Nonfarm Employment Change (Nov): U.S. private firms cut 32,000 jobs, the sharpest drop since March 2023, missing expectations for a 10,000 gain. Small businesses shed 120,000 positions, while medium and large companies added 51,000 and 39,000 jobs. Losses were concentrated in manufacturing, business services, information, construction, and finance. Gains were seen in education/health, leisure/hospitality, mining, and trade/transport. ADP’s Dr. Nela Richardson noted uneven hiring conditions shaped by cautious consumers.

U.S. Initial Jobless Claims: Claims fell by 27,000 to 191,000, the lowest since September 2022, even through the volatile Thanksgiving week. Continuing claims slipped to 1.94 million. Federal employee claims decreased by 599 to 1,125 after a temporary spike tied to the government shutdown.

Euro Area CPI (YoY, Nov): Inflation edged up to 2.2%, slightly above expectations. Services inflation rose to 3.5%, the highest since April. Energy deflation slowed, goods and food stayed steady, and core inflation held at 2.4%. Germany climbed to 2.6%; Spain and the Netherlands eased. France and Italy stayed well below target at 0.8% and 1.1%.

ISM Non-Manufacturing PMI (Nov): The U.S. ISM Services PMI rose to 52.6, the strongest in nine months. Business activity and new orders expanded, backlogs reached their highest level since February, and services momentum improved. Tariffs and the government shutdown weighed on costs and demand. Employment stayed in contraction, supplier deliveries slowed, and price pressures eased to a seven-month low.