• USD Outlook: The Fed is expected to deliver a 25bp rate cut in line with consensus, with limited scope for surprises to trigger major FX moves. Trump’s fiscal policies remain the key driver of market expectations, bolstering potential USD strength in January.
• Fed Guidance: A cautious Fed stance is anticipated, with modestly hawkish communication likely leaving markets content with January rate hold expectations and a 50% implied probability of a March hike.
• EUR Under Pressure: Weak German Ifo data sustains dovish ECB pricing. EUR/USD remains near 1.050, with continued bearish momentum expected into 2025, as Trump’s policies weigh further on the euro.
• UK Inflation Stable: November CPI data met expectations, with annual inflation rising to 2.6% and services inflation reaching 5%. This cements market expectations for the BoE to hold rates at 4.75% in Thursday’s policy meeting.
• Key UK Events Ahead: BoE Governor Bailey’s press conference on Thursday and UK retail sales data on Friday will provide further market direction, especially for potential policy easing in 2025.

USD: Trump Policies at the Fed’s Doorstep
Today’s Federal Reserve rate decision carries balanced risks for the dollar, with limited scope for surprises triggering major FX swings. Fiscal stimulus and other policy promises from President-elect Donald Trump could temper expectations for additional rate cuts reflected in the Fed’s dot plot. A 25bp rate cut, aligning with consensus, seems likely.

Even if communication leans dovish, we expect the Fed to maintain a cautious stance, leaving market expectations for Trump’s policies as the dominant driver of rate outlooks. January’s seasonal dollar strength may encourage bullish USD positioning as Trump’s agenda unfolds. Our baseline view sees a modestly hawkish Fed communication, with markets holding steady on January expectations and a 50% implied March hike probability. The USD OIS rate could hover near 4.0%, with DXY around 107.0 heading into the holidays.

EUR: German Weakness Keeps Euro in Check
Another drop in Germany’s Ifo index reinforces dovish European Central Bank (ECB) pricing, despite hopes for fiscal support from the upcoming German elections. A swift narrowing of the Atlantic rate spread appears unlikely.

EUR/USD remains anchored around 1.050, and we anticipate this trend through year-end. Our bearish stance continues into 2025, with Trump’s second term expected to weigh further on the euro.

In the UK, November CPI data aligned with expectations, showing an annual increase from 2.3% to 2.6%. Core services inflation rose from 4.5% to 4.7%, while EUR/GBP is likely to remain stable short-term, with potential BoE easing offering future support.

GBP: Inflation Holds Steady Ahead of BoE Decision
Sterling fluctuated on Wednesday following November CPI data, which met expectations. Annual headline inflation rose to 2.6% from 2.3%, while month-on-month growth slowed to 0.1% from 0.6%.

Core CPI, excluding volatile items, grew 3.5%, slightly below estimates but higher than the previous 3.3%. Services inflation—a key BoE metric—rose to 5%, solidifying expectations that the Bank will maintain rates at 4.75% during Thursday’s meeting. A potential 25bp rate cut from MPC member Swati Dhingra may spark interest, with Governor Andrew Bailey’s press conference offering further clues on 2025 policy easing.

Looking ahead, UK retail sales data on Friday will provide another key market indicator.