Assets Adjust to Shifting Rate Expectations (15-19 December)

Policy guidance from the Federal Reserve set the tone across asset classes, feeding into currency pricing, precious metals, energy markets, and bond yields, while developments in Europe, Japan, and China added regional contrast.

Together, the moves reflected a market recalibrating expectations for 2026 as growth, inflation, and labor signals continued to send mixed messages.

Currencies

Dollar Index: The dollar index stayed near 98.3, close to two-month lows, logging a third weekly decline as markets reassessed the Fed’s message and the 2026 path. Rates were cut to 3.50%-3.75%, the third move in a row, while guidance still points to only one cut next year. Policymakers remain split between inflation risks and softer labor signals, and firmer tones from other major central banks added pressure.
Euro: The euro traded around $1.17, its strongest level since early October, supported by broad dollar softness, firmer ECB messaging, and easing political tension in France. The Fed’s expected cut came with hints of a January pause, while expectations for ECB easing cooled after officials suggested further moves may not be needed in 2026. Lagarde flagged higher growth projections, and progress on France’s social-security bill reduced near-term risk.
British Pound: Sterling dipped slightly below $1.34 after UK GDP fell 0.1% in October, extending a four-month stall and missing forecasts. Even so, the pound held near two-month highs and remained on track for a 0.5% weekly gain, helped by broad dollar weakness. Focus shifts to next week’s BoE decision, where markets price a high probability of another cut.
Japanese Yen: The yen traded near 155.6 after two days of gains, supported by expectations of a BoJ hike next week and further tightening into 2026. Governor Ueda’s comments on progress toward the inflation target lifted near-term hopes, while reports suggest official backing for higher rates to counter yen weakness. Dollar softness following the Fed’s cut added support.

Commodities

Gold

Gold climbed above $4,300 per ounce, revisiting October’s record zone and setting up for a weekly gain. Softer labor signals, including higher jobless claims, strengthened expectations for two Fed cuts in 2026. The Fed’s recent 25 bp cut, Powell’s rejection of further hikes, and planned Treasury bill purchases, seen as capping yields, continued to limit prices.

Brent Crude

Brent steadied near $61.5 a barrel, yet remained set for a weekly drop exceeding 3% as markets focused on potential oversupply. The IEA reiterated a record glut with inventories at a four-year high, even after a slight revision. OPEC left its 2026 outlook unchanged, while developments tied to Venezuela and Russia-linked shipments influenced sentiment.

Silver

Silver eased below $62 per ounce after touching record levels, with profit-taking driving a modest pullback. The broader uptrend stayed intact, supported by the Fed’s recent cut and a softer policy tone. Strong ETF inflows, resilient retail demand, rising lease rates, and industrial use continue to signal tight physical conditions into next year.

Fixed Income

U.S. 10-Year Treasury: Trading near 4.2%, the highest since early September, as Fed officials urged caution on further easing after the third 25 bp cut, with debate split between inflation risks and labor-market strain and guidance pointing to just one move in 2026.
UK 10-Year Gilt: Slipped below 4.5% after October GDP contracted 0.1%, strengthening expectations for BoE easing in 2026, while markets still price close to a 90% chance of a 25 bp cut to 3.75%.
Japan 10-Year JGB: Moved up about 2 bps to around 1.94% on rising confidence in a BoJ hike next week and continued tightening into 2026, reinforced by Ueda’s inflation remarks and strong demand at a 20-year auction.
Germany 10-Year Bund: Held above 2.86%, near a nine-month high, as focus shifts to the ECB, with firmer Eurozone data and inflation leading markets to price roughly a 40% chance of a hike by late next year.

Economic Data

U.S. Fed Interest Rate Decision: The Fed lowered rates by 25 bps to 3.5%-3.75% in December, its third cut since September and the lowest level since 2022. The vote was split with three dissents, while projections still point to one cut in 2026, alongside slightly stronger GDP growth, lower PCE inflation, and unchanged unemployment forecasts for 2025-26.

U.S. Initial Jobless Claims: Initial claims jumped 44,000 to 236,000 in the week ending December 6, above expectations and the largest weekly rise since March 2020, reflecting holiday volatility. Continuing claims fell to 1.838 million, the lowest since April, highlighting underlying labor-market resilience.

U.S. JOLTS Job Openings (Oct): Job openings rose 12,000 to 7.67 million in October, following a strong upward revision in September, with gains led by trade, transport, utilities, and healthcare. The delayed September-October data still exceeded expectations overall.

China Balance of Trade: China’s trade surplus topped $1 trillion in the first 11 months, as exports climbed 5.4% and imports fell 0.6%. November’s surplus reached $112 billion, with exports up 5.9% year on year, driven by ASEAN and EU demand, even as shipments to the US dropped 28.6%.

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