Price Action Follows the Policy Divide (29 Dec-2 Jan)

Price action on the last week of the year reflected a steady recalibration of policy expectations rather than a shift in direction.

Currencies tracked central-bank divergence, commodities stayed sensitive to geopolitical risk and rate outlooks, and fixed income responded selectively to stronger economic data.

Currencies

Dollar Index: The index stayed near 97.9, its weakest level since early October, as expectations for two Fed cuts in 2026 remained intact despite solid GDP data. Down nearly 10% this year, it is on track for its worst annual performance since 2017, pressured by policy uncertainty and geopolitical stress.
Euro: The euro held above $1.17, close to its strongest level since late September, supported by the ECB’s extended pause, improved growth projections, and stable inflation outlook. Cooling US inflation and rising confidence in Fed easing continue to favor the single currency.
British Pound: Sterling climbed above $1.35 to a three-month high, helped by a softer dollar and narrowing yield gaps. Despite the BoE cutting rates to 3.75% and lingering inflation risks, the pound is up over 2% this month and nearly 8% year-to-date, its strongest run against the dollar since 2017.
Japanese Yen: The yen strengthened past 155 per dollar, supported by expectations of further BOJ tightening after rates were raised to 0.75%, the highest since 1995. Even with Tokyo inflation easing to 2%, policy signals and intervention risks remain key, alongside plans for a record fiscal 2026 budget.

Commodities

Gold Sets a New Record as Demand Rises

Gold climbed to a fresh all-time high near $4,530 per ounce, supported by sustained demand for defensive assets as geopolitical risks stay elevated and expectations build for US interest-rate cuts. Developments involving Venezuelan oil exports, the Russia-Ukraine conflict, and recent US military action in Nigeria have kept investors cautious, while easing inflation has strengthened bets on two Federal Reserve cuts next year. With gains now exceeding 70% in 2025, gold is on course for its strongest annual performance since 1979, backed by continued central bank buying and steady ETF inflows.

Brent Crude Slips as Risk Premiums Ease

Brent crude edged lower toward $61.5 per barrel in quiet post-holiday trading as optimism around Ukraine peace discussions reduced geopolitical premiums. Comments from Ukrainian and Russian officials pointing to possible US involvement raised expectations that additional Russian supply could return to an already well-supplied market. This offset earlier support from US actions targeting Venezuelan exports and a strike in Nigeria. Despite intermittent geopolitical support and resilient US data, oil remains under pressure, with WTI heading for its sharpest annual decline since 2020 amid expectations of a global supply glut next year.

Rate Cut Expectations Gather Silver Pace

Silver surged past $75 per ounce for the first time, driven by rising geopolitical tension and growing conviction that US interest rates will move lower. Concerns over potential energy supply disruptions linked to Venezuelan oil restrictions have reinforced safe-haven demand, while ongoing central-bank buying and steady inflows into exchange-traded products have added momentum. With lower rates improving the appeal of non-yielding assets, silver has climbed roughly 158% this year, marking one of the strongest performances across major commodities in 2025.

Fixed Income

U.S. 10-Year Treasury: The 10-year yield moved back toward 4.15%, recovering earlier losses as markets reassessed the Fed’s rate outlook. Even with two cuts still priced for next year, strong data (including Q3 GDP growth of 4.3%, the fastest pace in two years) has reinforced a more restrained policy stance, with Fed officials currently pointing to just one cut in 2026.
UK 10-Year Gilt: Gilt yields slipped to just below 4.49%, their lowest level in almost two weeks, after investors scaled back expectations for further easing. The Bank of England’s 25-basis-point cut passed on a narrow vote, signaling less appetite for rapid follow-up moves and keeping yields supported despite softer inflation and growth concerns.
Japan 10-Year Government Bond: The 10-year JGB held near the 2% level as markets continued to factor in additional Bank of Japan tightening. Tokyo inflation slowed to 2% in December, easing food and energy pressures, yet expectations remain firm following last week’s hike to 0.75%. Planned reductions in ultra-long bond issuance, steady 10-year supply, and higher short-dated issuance have also shaped positioning.
Germany 10-Year Bund: Bund yields hovered around 2.87%, easing slightly after the late December sell-off lost traction. The ECB’s extended pause keeps rates anchored for now, while persistent inflation limits the case for cuts. At the same time, Germany’s large, debt-heavy 2026 budget has kept fiscal concerns in focus, with the Bundesbank warning about rising deficits.

Economic Data

U.S. GDP (Q3): Economic growth accelerated to a 4.3% annualized pace in Q3 2025, the strongest in two years and well above expectations. Strong consumer spending, firmer exports, and higher government outlays drove the expansion, while softer imports and a smaller inventory drag also lifted overall growth.

U.S. Consumer Confidence (Dec): Consumer confidence slipped further to 89.1 in December, reflecting rising concerns over jobs, business conditions, and household finances. While inflation expectations eased and equity sentiment improved, spending preferences continued to shift toward essentials rather than discretionary purchases.

U.S. Initial Jobless Claims: Initial claims declined by 10,000 to 214,000 in the week ending December 20, undershooting forecasts and marking the lowest level since January outside holiday distortions. Continuing claims edged up to 1.92 million, pointing to a labor market marked by steady employment but slower hiring.

U.S. Durable Goods Orders (Oct): Durable goods orders fell 2.2% to $307.4 billion, reversing September’s gain and missing expectations. The drop was led by transportation equipment, particularly aircraft, while modest increases in machinery and core capital goods suggested underlying investment demand remains intact.

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