Market Brief: Currencies settle in for a long winter's nap 

Consolidative price action is taking place across financial markets this morning as risk appetite improves ahead of next week’s all-important Federal Reserve meeting. Benchmark ten-year Treasury yields are holding firm around the 4.11-percent handle, the dollar is trading sideways, and equity futures are setting for a continuation of an almost two week-long Santa Claus rally. Most major currencies are looking technically stretched against the dollar, with many trading beyond moving averages and Bollinger Band levels.

The US economy is still delivering contradictory signals. Consumer sentiment, as measured by the Conference Board and the University of Michigan, continues to deteriorate even as major retailers report robust year-over-year gains in sales. Headline inflation remains stubborn, yet shelter costs are easing and the pass-through from tariff hikes has been surprisingly modest. Private-sector job-creation indicators have slumped, but yesterday’s data showed initial jobless claims unexpectedly dropping to 191,000—the lowest since September 2022—underscoring the labour market’s underlying resilience.

Delayed numbers on personal income and spending are set for release at 10:00 this morning, giving Fed officials a final inflation reading ahead of next week’s meeting. Economists expect the core personal consumption expenditures index* to have risen 2.9 percent year-on-year in September—unchanged from the prior month—and we see little scope for material market-moving surprises given that both producer and consumer price indices are already in hand, and that the information is quite stale at this juncture.

Measures of implied volatility are declining and the dollar is softening as traders position for typical seasonal dynamics in foreign exchange markets. Global risk appetite often improves into the holiday period, nudging capital toward higher-beta currencies and away from the dollar’s safe-haven appeal, and US investors and corporates tend to engage in a flurry of tax-related transactions and portfolio rebalancing activities as year-end approaches. We’re aligned with the consensus in expecting the dollar bid to weaken amid thin liquidity conditions in the back half of the month.

But this pattern doesn’t always hold, and there are reasons to suspect that this year could hold some surprises. A number of major event risks loom, including next week’s central bank meetings, a series of delayed data releases covering labour market and inflation fundamentals in the world’s largest economy, and the potential naming of Powell’s successor at the Federal Reserve. Positioning against the dollar could get stretched, with most of the world’s biggest institutions expecting further declines in the year ahead, and few—if any—taking a more sceptical view on German fiscal stimulus plans or Japanese rate dynamics.

Ahead next week: Rate decisions from the Federal Reserve, Reserve Bank of Australia, Bank of Canada, and Swiss National Bank are likely to dominate market action, but it will be what policymakers say, not what they do, that will impact exchange rates. Although a cut in the United States is almost fully priced in—futures are currently putting 95-percent chances on a move—and investors are overwhelmingly positioned for holds from the other central banks, there is considerable uncertainty around how officials will describe the outlook and the monetary policy trajectory ahead. The Fed decision in particular could see some serious turbulence unleashed, with market participants picking up mixed signals from the official statement, the ‘dot plot’ summary of economic projections, and the press conference. If a hawkish tone emerges, traders—currently crowded into positions predicated on an aggressive easing cycle—could easily find themselves wrong-footed.

Against this backdrop, we would strongly suggest hedgers consider legging into trades, splitting transactions into tranches and placing them at varying levels over time. The odds on a clear directional trend holding through year end are low, meaning that a “swing for the fences” approach risks leaving organisations grappling with deep regrets as 2026 gets underway.

*We are contractually obligated, under the official Rules of Market Commentary, to note that this is “the Federal Reserve’s preferred inflation indicator”.

Market Overview

Notes: DXY: Dollar index, ON: Overnight movement, DMA: Daily Moving Average, Pivot points are calculated on a one-month basis, 3-month and 10-year spreads are against USD, Implied V.: implied at-the-money option volatility

Economic Calendar

*Please note: several US data releases have been removed, pending confirmation of release schedules from official statistical agencies.