← Back to posts🧠 Fed cut priced in, BoJ risks and oil shape FX

🧠 Fed cut priced in, BoJ risks and oil shape FX

Published: 12/5/2025

Overall Market Sentiment:

Risk tone is cautiously positive into the weekend. Global stocks are holding near recent highs, the VIX is around the mid teens near 16, and the dollar index is drifting just under 99 as markets price a high probability of another Fed rate cut next week while US 10-year yields hover a little above 4 percent. Gold sits close to fresh records around 4,230 dollars per ounce, Brent crude is near 63 dollars a barrel and Bitcoin trades just below 92,000, all consistent with an environment where investors expect easier policy but still want some hedges.





Geopolitics



Oil remains a key transmission channel from geopolitics to markets. Crude has held a two day gain as investors weigh stalled Ukraine ceasefire talks and renewed strikes on Russian energy infrastructure against signs of a growing global surplus and cautious medium term demand forecasts. Brent is trading around 63 dollars after a small pullback from Thursday’s close.


For FX, that mix usually means a modest support bias for energy exporters, a soft cap on inflation expectations, and only a limited safe haven bid into USD and CHF since the actual price level is still in the lower half of this year’s range. Gold edging higher alongside a softer dollar underlines that markets are hedging policy and geopolitical risk at the margin, but not yet pricing an outright shock.





Currency outlooks




🔻 USD: cut almost priced, safe haven role persists



The dollar index is trading around 98.9 to 99.0, near the lower end of its recent band after slipping from above 100 in late November. Fed funds futures imply roughly an 85 to 90 percent probability of a 25 basis point cut at next week’s meeting, on top of October’s move, with markets looking for around 75 to 100 basis points of easing over the next year.


The data backdrop is noisy because the long government shutdown forced cancellations and delays of key October releases, so the Fed is leaning more than usual on surveys and the November inflation prints. Today’s core PCE and next week’s CPI and payrolls cluster are therefore doing disproportionate work in shaping the near term path. The 10-year Treasury yield is a little above 4 percent and shorter maturities have eased from recent peaks, so the curve is only mildly inverted and the dollar’s yield advantage is narrower than earlier in the year.


Near term, if PCE and next week’s data are benign or soft, the combination of high cut odds and lower real yields keeps the risk bias slightly against the dollar, especially versus currencies where easing cycles are already advanced or central banks are still sounding hawkish. The counter scenario is a hawkish surprise in PCE or payrolls that forces markets to trim cut expectations and triggers a bounce from the 98.8 to 100 DXY range that traders are watching. Overall, that leaves a fairly balanced profile, with a gentle downside tilt rather than an outright bearish dollar call.





🔺 EUR: supported by soft USD and “on hold” ECB



EURUSD is trading near 1.166, close to the top of its recent range, as a softer dollar meets a euro area backdrop of inflation slightly above 2 percent and modest growth. Flash November estimates put headline HICP at 2.2 percent year on year, up a touch from 2.1 percent, with core around 2.4 percent and unemployment steady near 6.4 percent, which together point to a slow but not recessionary environment.


The ECB has kept the deposit rate at 2.0 percent and its latest communication continues to frame policy as in a good place, with decisions taken meeting by meeting and no urgent push toward further easing. Against a Fed that is actively cutting, that relative stance means rate differentials are no longer moving clearly against the euro and, on some horizons, are gradually becoming more supportive.


For the coming week, markets are watching EURUSD around the 1.16 area as a pivot, with 1.15 marked out as first support and 1.17 to 1.18 as a resistance band. If US data validate current Fed cut pricing without a sharp risk off shock, the risk skew leans toward the euro grinding a bit higher versus USD, while most EUR crosses stay more range bound and driven by local stories.





⚖️ GBP: budget relief vs soft growth and dovish BoE



Sterling is consolidating after a strong run, with GBPUSD oscillating just under the 1.3350 area and having stalled near five week highs, while EURGBP trades around the high 0.87s to 0.88 region. The Autumn Budget on 26 November removed some near term uncertainty and produced a relief rally after the pound had hit multi month lows earlier in November, but the medium term growth and fiscal picture remains challenging.


The Bank of England kept Bank Rate at 4 percent in November in a very narrow 5 to 4 vote, with four members already favouring a cut to 3.75 percent, and markets see a decent chance that the first move comes in the next few meetings as inflation drifts lower from 3.6 percent. That combination, looming monetary easing plus a tighter budget that weighs on household incomes, tends to limit upside for GBP on a multi week horizon, even if a soft dollar allows some resilience in the very near term.


For the week ahead, with no major UK data until later in the month, sterling will mostly take its cue from US releases and global risk appetite. Overall, the risk tilt looks broadly neutral, with some scope for modest further gains versus USD if the Fed cuts as expected, but less obvious room for outperformance against EUR or high beta currencies where central banks are already closer to the end of their easing cycles.





🔻 CAD: early easing and uneven data keep loonie heavy



USDCAD is trading around 1.39 to 1.40 after bouncing from five week lows near 1.3940, leaving the pair in the middle of its recent range but still with a soft tone for CAD. The Bank of Canada has already cut its overnight rate to 2.25 percent after a second consecutive 25 basis point move in October, citing a cooling labour market and inflation drifting back toward the 2 percent target.


Q3 GDP surprised to the upside at 2.6 percent annualised, avoiding a technical recession, but officials and recent commentary emphasise that growth momentum into Q4 is weak and that October GDP may even have contracted slightly. Oil provides some cushion but not a boom, with Brent futures around 63 dollars and longer term assumptions being nudged lower as analysts see supply growth outpacing demand later in the decade.


With the Fed also easing, relative policy does not obviously favour either side, but Canada’s earlier and deeper cuts plus softer domestic indicators keep the risk bias for CAD tilted toward mild underperformance, particularly if US data do not fall sharply and if oil fails to break meaningfully higher.





🔻 CHF: ultra low inflation and a stretched franc



The franc is expensive by most measures, with USDCHF trading just under 0.80 and EURCHF around 0.934, yet domestic inflation has faded to essentially zero. Swiss CPI for November was flat year on year and underlying measures have slowed to multi year lows, just days before the Swiss National Bank’s final decision of 2025.


The policy rate is already at 0 percent and guidance suggests the bar for returning to negative rates is high, but officials continue to emphasise that they are willing to lean against excessive currency strength if needed. With global risk sentiment reasonably constructive and gold providing an alternative hedge, near term safe haven demand for CHF looks modest.


That leaves the risk tilt for the week ahead skewed slightly toward franc softness versus EUR and potentially versus USD if the Fed cut comes without a major risk off shock. However, any abrupt escalation in Ukraine or a sharp equity wobble could still produce quick bursts of CHF strength given the strong starting point.





🔺 JPY: BoJ hike risk and rising yields support the yen



USDJPY is trading around 154.5 to 155.0, off this year’s highs but still historically elevated, as markets increasingly price the risk of a December rate hike from the Bank of Japan. Recent comments from policymakers and local analysis highlight that the December meeting will actively weigh another increase, and the 10 year JGB yield has climbed to about 1.9 percent, its highest level since 2007, which confirms a material shift in Japan’s rate landscape.


The policy gap with the United States is still wide, but if the Fed cuts while the BoJ nudges rates higher, that differential narrows from both directions and makes yen funded carry trades more vulnerable to any risk off episode. In the very near term, JPY can still weaken on days when US yields back up or risk appetite surges, yet the medium term balance of risk has shifted toward a stronger yen on a one to three month horizon if the BoJ delivers or strongly signals a hike.


Key levels many watch are the 154 area as a near term support in USDJPY after this week’s pullback and the 157 to 159 band as the region that would signal markets have started to doubt the December hike story.





🔺 AUD: hot inflation and firm data keep AUD on the front foot



AUDUSD is trading around 0.66 to 0.662, near a two month high, as the currency continues to benefit from a hotter than expected inflation pulse and solid domestic spending data. Headline CPI has risen to about 3.8 percent year on year with trimmed mean around 3.3 percent, both above the RBA’s 2 to 3 percent target range, and recent household spending data showed a strong monthly gain.


The RBA left the cash rate at 3.60 percent in early November and emphasised a cautious, data dependent stance, while markets have trimmed expectations of early cuts and now assign some probability to another hike in 2026 if inflation stays sticky. With the Fed now easing while Australia is effectively on hold, relative yield dynamics have tilted in favour of AUD, especially while global risk appetite is stable.


Into next week’s relatively light local calendar, the risk bias remains toward continued AUD resilience or modest further appreciation as long as Chinese data do not deliver a large negative surprise and US data do not trigger a sharp dollar rebound.





🔺 NZD: “hawkish cut” leaves kiwi relatively well supported



NZDUSD is trading around 0.576, just below recent highs in the mid 0.57s, consolidating gains after the November policy decision. The RBNZ cut the Official Cash Rate to 2.25 percent on 26 November but framed the move as part of a now very advanced easing cycle, with inflation at 3 percent, the top of the 1 to 3 percent band, and projected to fall back toward 2 percent by mid 2026.


The bank’s record emphasised that policy is already highly accommodative and that further reductions would depend on how growth and inflation evolve rather than being pre committed, which markets interpret as a signal that the trough in rates is close. Against a Fed that is still cutting, that leaves New Zealand offering a relatively attractive yield profile in developed FX, even though domestic data show a soft labour market and housing headwinds.


Near term, the kiwi is likely to trade as a high beta expression of global risk appetite, but starting from a firmer policy base than earlier in the year. Risks lean slightly toward further NZD strength if the Fed cut lands as expected and risk sentiment holds, with markets watching 0.57 as first support and 0.58 as the initial topside reference.





Cross-asset wrap



  • 🪙 Gold:
    Gold is trading around 4,230 to 4,235 dollars per ounce, only a little below recent record levels, as a softer dollar and high odds of a Fed cut offset the drag from slightly higher nominal yields. In this environment the metal is behaving less like a pure crisis barometer and more like a long duration hedge against policy uncertainty and real rates that are expected to drift lower.

  • 🛢 Oil:
    Brent is hovering around 63 dollars after a choppy week, supported by Ukraine related supply risk and stalled peace talks but capped by evidence of a swelling global surplus and analyst expectations that demand will only see decent growth for another several years. Prices at these levels help the global disinflation narrative and support energy exporters at the margin without creating a new inflation scare.


  • 📈 Stocks:
    Major equity indices are close to cycle highs, with broad global gauges edging higher this week while the VIX sits near 16. The pattern is consistent with a market that is leaning into the Fed cut story but still sensitive to any upside surprises in US inflation or downside shocks to growth.


  • ₿ Crypto:
    Bitcoin is trading just under 92,000 dollars after a volatile week of sharp swings, with recent price action closely tracking shifts in Fed expectations and equity risk sentiment rather than idiosyncratic crypto news. As long as real yields drift lower and the dollar stays soft, crypto tends to trade like a high beta extension of the broader risk complex.





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