• USD Stays Firm Amid Fed Week: Markets expect a 25bps rate cut on Wednesday, shifting focus to the Fed’s 2025 forecasts, which now predict three rate cuts. The dollar remains supported by strong retail sales data and a lack of dovish surprises.
• External Factors for USD: The dollar could be influenced by continued pressure on the Chinese renminbi and further rate cuts in Europe, with the DXY likely holding above 106.50 and pushing higher if eurozone PMI data disappoints.
• EUR Faces PMI and Political Uncertainty: December flash PMIs are expected to highlight economic challenges, while German Chancellor Olaf Scholz’s no-confidence vote could trigger early elections. Potential fiscal stimulus in 2025 may support the euro long-term.
• EUR/USD and EUR/GBP Outlook: EUR/USD hovers near 1.0500, facing downside risks from weak data, while EUR/GBP’s recent rally may stall near 0.8350 ahead of UK inflation and Bank of England decisions this week.
• GBP Under Pressure Amid Key Data: Sterling weakens after poor GDP data, with GBP/USD sliding to 1.2623. This week’s PMI, labour market, and CPI data are critical, with stronger readings needed to stabilize the Pound amid rising BoE rate cut expectations.

USD: Dollar Steady as Fed Week Takes Center Stage

Markets are gearing up for the Federal Reserve’s meeting this Wednesday, where a 25bps rate cut to 4.25-4.50% is fully priced in. The focus will likely shift to the Fed’s reasoning for skipping a January meeting and its updated 2025 projections, now forecasting three rate cuts instead of four. With no dovish surprises expected, the dollar remains supported, especially with strong November retail sales data (0.4% MoM growth) pointing to resilient consumer spending.

However, external factors could sway the dollar, particularly continued pressure on the Chinese renminbi and further rate cuts in Europe. Speculation around another 1985-style Plaza Accord to weaken the dollar seems unfounded. Instead, 2025 may resemble the early 1980s, with the dollar bubble inflating further. The DXY index should hold near 106.50/70 and could rise above 107.00 if eurozone PMI data underwhelms today.

EUR: PMI and Political Drama Shape the Outlook

Today’s spotlight is on the December flash PMIs for France, Germany, and the eurozone. While November’s numbers weren’t as grim as feared, all remain in contraction, underscoring economic challenges. Adding to the uncertainty, German Chancellor Olaf Scholz faces a no-confidence vote, likely triggering February elections. Both major parties appear open to fiscal stimulus, which could support the euro later in 2025, though near-term risks persist.

Key ECB speakers, including President Christine Lagarde, are scheduled today. Any pushback against sub-neutral rate expectations could lend some upside to EUR/USD, which is currently trading near 1.0500 with potential downside risk.

EUR/GBP recently bounced on weak UK GDP data, but the rally may stall near 0.8350 as attention shifts to UK CPI and the Bank of England meeting later this week.

GBP: Pound Faces Data-Heavy Week Amid Weakness

Sterling enters the week on the back foot after Friday’s selloff, driven by disappointing GDP data and negative fiscal messaging from the UK government. The Pound’s recent highs against the euro and dollar have reversed, with GBP/USD sliding to 1.2623 and GBP/EUR retreating to 1.2028.

This week’s UK data, including the December PMI survey, labour market report, and inflation figures, will be critical. A stronger-than-expected Services PMI (forecast: 51) or resilient wage growth (expected: 5%) could stabilize Sterling. However, a weaker showing might increase bets on more aggressive Bank of England rate cuts, further pressuring the Pound.

Lead FX strategist George Vessey notes, “The Pound’s weakness may extend, particularly if BoE easing bets gain momentum.”