← Back to posts🧠 Fed hawkish cut risk and BoJ hike odds drive FX

🧠 Fed hawkish cut risk and BoJ hike odds drive FX

Published: 12/8/2025

Overall Market Sentiment:

Markets are starting the week in a cautiously constructive mood. Global equities are pushing toward record territory, the VIX is in the mid teens around 16, and the dollar index is hovering just under 99 as traders price a high likelihood of a Fed cut on Wednesday but brace for potentially “hawkish” guidance.


US 10-year yields are near 4.1 percent and 2-year yields around 3.6 percent, so the curve is only mildly inverted, while gold trades a little above 4,200 dollars, Brent crude is around 63 to 64 dollars, and Bitcoin is back near 90,000. The core macro tension this week is simple: the Fed is very likely to ease, the BoJ is very likely to tighten, and everyone else is mostly on hold.





Geopolitics



Ukraine related attacks on Russian oil infrastructure and pipelines are still adding a modest risk premium to crude, with Brent futures trading around 63 to 64 dollars per barrel after recent strikes, even as weak demand and rising inventories cap the move. Rating agencies have also nudged medium term oil price assumptions lower, arguing that global supply growth is likely to outpace demand later in the decade.


For FX, that usually means mild support for oil linked currencies such as CAD and NOK, some background demand for classic hedges like JPY and CHF, but not a full blown risk off move since spot prices remain in the lower half of this year’s range.





Currency outlooks




⚖️ USD: Fed cut is priced, “hawkish cut” is the risk




The dollar index is trading around 99 after drifting lower through late November, close to the bottom of its recent band. Futures markets put the chance of a 25 basis point cut at roughly 85 to 90 percent this week, helped by soft payrolls and benign core PCE, but there is growing talk that the Fed will deliver a “hawkish cut” and push back against aggressive easing expectations for 2026.


With 10-year yields around 4.1 percent and 2-year yields near 3.6 percent, the United States still offers a reasonable yield pickup, though less than earlier in the year, especially if the Fed signals only a shallow path of further reductions. The missing piece is data clarity. The long government shutdown wiped out several October releases, so the Fed is leaning heavily on partial indicators and the fresh November numbers that land around the meeting.


Near term, that leaves dollar risks fairly balanced. If the Fed cuts and sounds cautious on further easing, the dollar can easily bounce within the 98.8 to 100 DXY range. If instead the tone is dovish and the dot plot shifts down more than expected, the path of least resistance is for gradual further softness against currencies whose central banks are closer to finished with easing.





🔺 EUR: soft dollar plus “steady ECB” is a gentle tailwind



EURUSD is trading a bit above 1.16 after leaning on support near 1.1630 earlier in the session, helped by a weaker dollar and a Eurozone backdrop that is soft but not distressed. Headline inflation edged up to 2.2 percent year on year in November from 2.1 percent and core is around 2.4 percent, while unemployment is stable at 6.4 percent, which together argue for an extended ECB pause rather than a rapid cut cycle.


The deposit rate sits at 2.0 percent and recent messaging has framed policy as in a good place, with markets not really pricing meaningful easing until well into 2026. Relative to a Fed that is actively cutting, this steadier stance means interest rate differentials are no longer pushing clearly against the euro and may slowly become a mild positive.


Into the week ahead, the euro is likely to trade as a measured beneficiary of any further dollar softness rather than a runaway outperformer in its own right. Markets are watching the 1.16 area as a pivot, with 1.15 as a broad support zone and 1.17 to 1.18 as resistance that would come into view if the Fed delivers a dovish cut and risk appetite stays firm.





🔻 GBP: Budget and BoE cut risk cap sterling on rallies



Cable is consolidating near recent highs, with GBPUSD trading around 1.33 and EURGBP in the high 0.87s. The Autumn Budget leans on tax rises and a tighter fiscal stance, and the latest official forecast points to subdued UK growth in the coming years, even as the employment rate is expected to drift lower.


Bank Rate sits at 4.0 percent after a narrow 5 to 4 decision to hold in early November, and markets see a non trivial chance of a first cut in the next few meetings, helped by inflation easing to around 3.6 percent in October. That policy mix, looming monetary easing plus fiscal drag, tends to limit how much investors reward sterling on strength, particularly against the euro and higher beta currencies that enjoy firmer domestic data.


Over the coming week, the pound will mostly take its cue from the Fed and from global risk tone. With GBP already near the upper end of its recent range and the BoE likely to follow the Fed into easing in 2026, the balance of risk still leans toward sterling underperforming on a multi week horizon, even if short term moves remain two sided around current levels.





⚖️ CAD: strong jobs offset earlier cuts, oil offers only a modest lift



USDCAD is trading around 1.38 to 1.39 after the Canadian dollar surged to a ten week high on Friday on the back of much stronger than expected employment data. The Bank of Canada cut its policy rate to 2.25 percent in October, but Q3 GDP grew about 0.6 percent quarter on quarter and 2.6 percent annualised, and the labour market has now posted three consecutive months of solid gains, which together argue for a pause at this week’s meeting.


Brent crude near 63 to 64 dollars and WTI close to 60 provide a mild terms of trade tailwind, though not enough to recreate previous commodity booms, especially with rating agencies cutting medium term oil price assumptions. With the Fed also easing, relative policy does not clearly favour either side, and CAD often ends up trading as a middling risk asset between high beta FX and low yielding havens.


For the week ahead, that leaves CAD risks broadly balanced. Better domestic data and firmer oil argue for some resilience, whereas the earlier and deeper BoC cuts and ongoing global trade uncertainty still justify some caution, with many watching the 1.37 to 1.40 USDCAD band as the operative range.





🔻 CHF: inflation at zero and a very strong franc



USDCHF is trading around 0.80 and EURCHF just under 0.94, levels that leave the franc very strong in real terms just as inflation has effectively dropped to zero. Swiss CPI stalled at 0.0 percent year on year in November and an underlying gauge is at a four year low, which is a clear setback for policymakers only days before the final policy meeting of the year.


The SNB’s policy rate is at 0 percent and markets expect it to stay there, with recent commentary suggesting officials will avoid a return to negative rates for now, even though they remain uncomfortable with the currency’s strength. With global risk sentiment reasonably constructive and gold offering an alternative hedge, safe haven demand for CHF is limited at the margin.


Taken together, that leaves the near term risk tilt pointing toward a somewhat softer franc over the next few weeks, especially versus the euro if the ECB simply stays on hold while the SNB continues to tolerate, or even quietly lean against, further appreciation.





🔺 JPY: BoJ hike odds near 90 percent keep yen supported



USDJPY is trading around 155.2 to 155.5 after sliding through much of November, as markets increasingly price a December rate hike from the Bank of Japan. Overnight index swaps now imply a very high probability that the BoJ lifts the policy rate from 0.5 to 0.75 percent, and Japanese wage data have reinforced the narrative that inflation pressures are broad enough to justify another step away from ultra easy policy.


Ten year JGB yields are holding near multi year highs close to 1.9 percent, and government sources have signalled that the administration is prepared to tolerate a moderate hike, which makes yen funded carry trades more vulnerable to any wobble in global risk sentiment. At the same time, the policy gap with the United States is still large, so intraday swings can remain sharp around Fed headlines.


For this week, the balance of risk remains tilted toward bursts of yen strength on any combination of a confirmed BoJ hike signal, a dovish Fed cut, or risk off headlines. Market participants are treating the 155 area as a near term pivot and the 157 to 159 band as the region that would suggest markets have started to doubt the December hike story.





🔺 AUD: RBA on hold but data keep upside risks alive



AUDUSD is holding near 0.665, its highest level in roughly two and a half months, after a strong run last week helped by firm domestic data and a softer dollar. Annual CPI is running at about 3.8 percent as of October and trimmed mean is a bit above 3 percent, both higher than the midpoint of the RBA’s 2 to 3 percent target band, while Q3 GDP grew around 0.4 percent quarter on quarter.


The cash rate is 3.60 percent and all surveyed analysts expect the RBA to hold tomorrow, but the tone of the statement could easily lean toward highlighting upside inflation risks for 2026 rather than endorsing early cuts. With China still a growth headwind but not deteriorating rapidly, and the Fed moving into easing while the RBA sits tight, relative yield dynamics look supportive for AUD.


Near term, risks for the Aussie remain tilted toward continued resilience or modest further appreciation, particularly if the RBA sounds even slightly more hawkish than markets expect and global risk appetite stays constructive.





🔺 NZD: “end of easing” message keeps kiwi relatively attractive



NZDUSD is trading around 0.578, near the top of its recent range, after the RBNZ cut the Official Cash Rate to 2.25 percent in late November but signalled that the easing cycle is now essentially finished. The November Monetary Policy Statement and communication stressed that further moves will depend on the medium term inflation outlook, with projections showing inflation drifting from around 3 percent back toward the 2 percent midpoint by mid 2026.


Forward paths in the projections even have the OCR nudging a bit higher again over the longer horizon, and local commentary has interpreted this as a classic “hawkish cut” and likely trough in rates, which helps explain why NZD has rallied since the decision. Against a Fed that is still easing, that leaves New Zealand offering a relatively appealing yield profile within developed FX, albeit with the usual high beta sensitivity to global risk.


Into the week ahead, the kiwi is likely to trade as a leveraged expression of broader risk appetite and the Fed decision, but starting from a strong base. Market participants are watching 0.57 as initial support and 0.58 to 0.579 highs as the topside reference zone.





Cross asset wrap



  • 🪙 Gold:
    Gold is trading a little above 4,200 dollars an ounce and not far from record territory, supported by a softer dollar and an implied probability near the high 80s for a Fed cut that keeps real yields contained. In this environment the metal is behaving as a hedge against policy and growth uncertainty rather than a pure crisis asset, and tends to stay bid as long as markets see a gentle easing cycle rather than a renewed inflation scare.
  • 🛢 Oil:
    Brent futures are around 63 to 64 dollars, stabilising near two week highs as Ukraine related disruptions and cautious OPEC messaging offset concerns about oversupply and tepid demand growth. For FX, that level is supportive enough to help CAD and other producers at the margin, but not high enough to create a new inflation problem for consumers.
  • 📈 Stocks:
    Major indices such as the S&P 500 are trading close to record levels, with the S&P near 5,280 and the Nasdaq 100 eyeing the 17,200 area as investors lean into the Fed cut story while accepting some near term volatility around the decision. The VIX around the mid teens fits a backdrop of constructive but data sensitive risk appetite.
  • ₿ Crypto:
    Bitcoin is trading near 90,000 dollars after recovering from recent lows, with price action again tracking shifts in Fed expectations and broad risk sentiment more than crypto specific news. In general, easier policy and a weak dollar tend to support crypto as a high beta extension of the risk complex, while any hawkish surprise from the Fed or a sharp rise in real yields usually hits it disproportionately.





This is general, educational market commentary, describing how macro data, policy expectations and sentiment are interacting across FX and major asset classes. It is not investment advice and not a trading signal.