CAD
USDCAD took yet another leg higher on the FOMC’s latest policy decision, with the pair shooting through 1.44 overnight. While the move has moderated somewhat this morning, the loonie is still trading substantially weaker than pre-Fed announcement levels as widening US-Canadian rate differentials support upside for the pair. We expect this to continue in the early part of next year too, exacerbated by tariff risks. As such, we continue to look for USDCAD to end 2025 at around the 1.50 level.
USD
The FOMC cut rates by 25bps yesterday, in line with consensus expectations. Revisions to the Fed’s Summary of Economic Projections, however, were revised more sharply than markets had positioned for, consistent with our own house call for the FOMC to deliver a hawkish surprise to end the year. Indeed, the committee now only sees 50bps of cuts through the entirety of 2025 – a rate path that we think is most consistent with a prolonged pause through the first half of next year at the very least, validating our post-election prediction for a hawkish Fed pivot on sticky price growth and upside inflation risks. Granted, events over the coming months could still undermine this view. But for now, we are sticking with our call for the Fed to stand pat over coming meetings. Crucially from an FX perspective, this view is now shared by markets. Swaps have a rate cut only fully priced by July next year as of writing, a sharp paring back of easing bets relative to pre-announcement expectations. This shift has propelled the DXY index above 108, with the index briefly charting new post-COVID highs yesterday evening. Moreover, it leaves the greenback on the front foot as markets wind down for Christmas, setting up the dollar for a strong end to the year.
JPY
In the other big event overnight, the BoJ disappointed markets with another dovish policy decision. Admittedly, this was not entirely unexpected, with policymakers steering markets away from a rate hike in recent days, in contrast to the more hawkish rhetoric delivered earlier in the year. Combined with the Fed’s unexpected hawkishness yesterday evening, this had taken USDJPY north of 156 in early trading, with growing risks that a return to the 160s is on the cards before year-end.
EUR
As predicted, EURUSD ended Thursday trading down in the 1.03s on the back of FOMC hawkishness yesterday evening. While the pair has since retraced a little higher early this morning, we suspect these new ranges are here to stay for the single currency. Political dysfunction at home combined with Fed hawkishness in the US is hardly a positive mix for EURUSD, one that we continue to think will see the pair end 2025 at 1.03.
GBP
After briefly dipping into the 1.25s yesterday, GBPUSD is back above 1.26 this morning. That said, with a BoE meeting coming up at 12:00 GMT, we see the balance of risks tilted favour of further sterling weakness today. Admittedly, no change in rates is expected from today’s decision, and the policy statement is more likely than not to say little of note, a scenario that should leave the pound broadly changed. But, if there is a market moving steer from the MPC, it is likely to be dovish relative to consensus given that markets expect just two rate cuts next year, while recent comments from Governor Andrew Bailey indicated a base case of four. If the MPC chooses to double down on this prior guidance, then sterling weakness should ensue. Accordingly, we see risks ahead of today’s decision as asymmetric and skewed to the downside for GBP.
This content was originally published by our partners at Monex Canada.