The United States dollar index (DXY) ended lower for the third consecutive week after the Federal Reserve moved in line with market expectations and cut interest rates by 25 basis points, reinforcing the view that U.S. monetary policy has shifted into a gradual easing phase.
The DXY touched fresh two-month lows during the week and remains on track to record a second straight monthly decline.
Markets had largely priced in the Federal Reserve’s decision to lower the federal funds target range to 3.50%–3.75%, but sentiment towards the greenback softened further after policymakers announced a renewed balance sheet expansion.
The Fed said it would begin purchasing US$40 billion of Treasury bills per month, signalling a willingness to support liquidity as growth momentum cools.
The rate cut was not framed as a declaration of victory over inflation, but rather as an acknowledgement that the labour market is losing momentum and that the risks of waiting too long to ease policy are beginning to outweigh the risks of moving slightly earlier.
While inflation is still not fully aligned with the Fed’s target, officials appear increasingly comfortable that remaining price pressures are driven by temporary factors, including tariffs, rather than an overheating economy.
However, divisions within the Federal Reserve remain clear. Some policymakers favour a cautious approach, arguing that rates should only be reduced when incoming data demands it, while others are more focused on mounting signs of stress in the labour market.
What unites the committee is the sense that the tightening cycle has ended, with further rate hikes no longer under consideration.
Now, investors turn focus toward a raft of delayed employment, inflation and other economic data due this week, expected to provide a long-awaited snapshot of the U.S. economy, and potentially shaping market direction into year-end.
Euro holds near multi-month highs
The euro remained resilient near multi-month highs, with the EUR/USD currency pair holding around 1.1740 despite a steady stream of Federal Reserve speakers stressing inflation concerns and reinforcing a wait-and-see stance following last week’s rate cut.
The pair retained a modest upward bias even as hawkish commentary tempered expectations for rapid easing in the U.S.
In the eurozone, inflation signals were mixed. Germany’s harmonised consumer price index fell 0.5% month-on-month in November, in line with expectations and unchanged from October, while annual inflation held at 2.6%.
In Spain, however, harmonised inflation rose 3.1% year-on-year, above both forecasts and the previous month’s reading, highlighting ongoing divergence across the bloc.
Aussie supported by policy divergence
The Australian dollar held firm against the U.S. dollar, supported by widening monetary policy divergence as the Federal Reserve moved further into easing territory while the Reserve Bank of Australia held its cash rate steady at 3.6% for a third consecutive meeting.
The RBA reiterated a cautious, data-dependent stance amid lingering inflation risks, while markets increasingly price in a prolonged pause in Australian policy, with some expectations that the next move may not come until 2026.
In contrast, U.S. rate expectations remain tilted towards further easing next year, helping to keep the AUD/USD pair on track for a third straight weekly gain.
With key central bank decisions now behind markets, attention is shifting to data, including Australian and U.S. purchasing managers’ indices, U.S. nonfarm payrolls, retail sales and inflation figures. These will be critical in shaping near-term direction.
Sterling firms ahead of BoE decision
Sterling posted a third consecutive weekly gain, with GBP/USD breaking above the 1.34 level, driven largely by renewed weakness in the U.S. dollar following the Federal Reserve’s rate cut.
The pound is set to remain in focus as traders look ahead to a busy UK calendar and the Bank of England’s (BoE) policy meeting on 18 December.
The BoE kept rates unchanged at its November meeting, but a narrow 5–4 vote and increasingly dovish guidance revived expectations of a December rate cut.
Policymakers signalled that if disinflation continues, rates are likely to follow a gradual downward path, a subtle shift in language that markets have taken seriously. Current pricing implies a high probability of a quarter-point cut later this month.
Yen underperforms despite BoJ hike bets
The USD/JPY currency pair rebounded to finish near 155.80 as the Japanese Yen underperformed, even as markets remain confident the Bank of Japan (BoJ) will raise interest rates at its upcoming meeting.
Expectations of a BoJ hike are underpinned by confidence that inflation is on track to return sustainably to the 2% target.
BoJ Governor Kazuo Ueda reiterated last week that while rates are likely to rise further, there remains uncertainty over how far policy can be tightened.
In the near term, attention will centre on U.S. employment and activity data, which will influence both U.S. yields and broader risk sentiment.
Economic calendar week ahead
On Monday, markets will digest Japan’s Tankan large manufacturers index, alongside a batch of Chinese data including house prices, fixed asset investment, industrial production, retail sales and the unemployment rate, while the eurozone releases industrial production figures.
Tuesday brings Canadian housing starts and inflation data, while the U.S. publishes the Empire State manufacturing index, NAHB housing market index and speeches from Federal Reserve officials. Australia and Japan will release S&P Global PMIs, and the UK reports labour market data and PMIs, with the eurozone also releasing trade and sentiment indicators.
On Wednesday, focus turns to a heavy U.S. data slate including building permits, housing starts, ADP employment figures, delayed Nonfarm Payrolls, the unemployment rate, retail sales and PMIs. The UK will release inflation data, while the eurozone publishes final inflation and wage growth figures.
Thursday is highlighted by the Bank of England’s interest rate decision and meeting minutes, alongside US retail sales, business inventories and further Fed speeches.
On Friday, the European Central Bank will announces its policy decision, while the US releases consumer price inflation and regional manufacturing data. Japan will also publish inflation figures and deliver its Bank of Japan rate decision.
