• USD and China: The dollar softened slightly as China’s plans to boost consumption raised hopes for global currencies like the AUD and ZAR. Key US CPI data is due tomorrow, with DXY support seen at 105.40/60.
• EUR and the ECB: Limited impact from recent German and Italian data, with markets expecting a 25bp ECB rate cut on Thursday. EUR/USD saw a slight pullback, awaiting clarity from the meeting.
• GBP Stability: The pound held steady near 1.2750, with markets focused on US CPI data tomorrow. Inflation expectations remain aligned with Fed targets.
• Market Sentiment: Investors are cautious ahead of major central bank decisions and inflation reports, keeping volatility subdued.
• Midweek Outlook: Key events include China’s policy announcements, US CPI data, and the ECB meeting, all likely to shape currency movements.

USD: A Lift from China’s New Pledge
The dollar eased slightly against most currencies on Monday following China’s announcement to “forcefully” boost consumption. This could align with President-elect Donald Trump’s aim to tackle China’s $300bn trade surplus with the US. The news particularly favored China-sensitive currencies like the Australian dollar and the South African rand. Anticipation for further policy announcements from China midweek may lend mild support to non-US currencies.

Today, a light US data calendar keeps attention on the NFIB Small Business Optimism Index, which is expected to show modest improvement. However, with the US CPI release looming tomorrow, the DXY is unlikely to dip much further, with key support seen at 105.40/60.

EUR: All Eyes on the ECB
Germany’s final November inflation data remained steady at 2.2% year-on-year, while Italy’s industrial production figures are unlikely to sway expectations for Thursday’s ECB meeting. Markets are pricing in a 25bp rate cut, though the press conference could hint at future easing measures, signaling a dovish tone for the euro.

Yesterday, the EUR/USD rate saw some reversal, closing lower at 1.055 after touching 1.060 earlier. With limited action expected before Thursday, the ECB meeting will be the key driver for the pair’s next move.

GBP: Steady Ahead of US Inflation Data
The pound (GBP) held steady near 1.2750 against the dollar during Tuesday’s European session. Markets await Wednesday’s US CPI release, with annual headline inflation forecasted to rise slightly to 2.7% from October’s 2.6%. Core CPI is also expected to show consistent growth.

Barring significant surprises in the inflation report, market expectations for the Fed’s December 18 rate decision are unlikely to shift. Fed officials remain confident about inflation trending towards their 2% target, suggesting limited immediate impact on GBP/USD movements.