Market Commentary – December 2025

Uncertainty Mounts as FOMC Delivers Final Cut of 2025

The US dollar broadly weakened in December as incoming economic data skewed soft and market participants interpreted fresh Fed projections as less hawkish than feared. The Fed delivered a 25bps cut at its December meeting, as expected, but multiple dissents highlighted growing divisions within the FOMC. The new dot plot differed little from the September edition, with just one cut projected in 2026 as policymakers expect stronger growth in the coming year. The Fed is squarely back in “wait-and-see” mode as it waits for economic data to catch back up and for the economic situation to evolve. The period of insurance cuts appears to be over as Powell declared the Fed has “brought our policy within broad estimates of the neutral range,” but posited that going forward there is “no risk free path for policy.”

Markets continued to work through the incoming backlog of US government data following the end of the federal shutdown, as employment and CPI data for both October and November were released. Both releases undershot consensus by a wide margin, but complications in data collection, particularly for the month of October, ultimately limited insights into the US economy. Given concerns over data reliability, Fed officials are likely to look past this data period in their decision making, which limited the dollar impact in the aftermath. That said Powell commented that NFP is likely overestimating job gains by ~60K per month, implying the US has seen effectively zero net job growth since April 2025.

Central Banks Wrap Up Turbulent Year

The BoJ, BoE and ECB wrapped up 2025 with their own respective policy meetings. The BoJ raised its policy rate by 25bps to 0.75%, its highest level since 1995, as part of the bank’s ongoing interest rate ‘normalisation’ process. The move was widely expected, and the yen weakened vs. peer FX in the aftermath, reflecting market concerns surrounding expansionary fiscal policies of Prime Minister Takaichi, as sovereign debt becomes more expensive to finance. Key to this concern is the passing of the $118 billion supplementary FY25 budget in December, comfortably exceeding the size of the previous year. That said, the LDP functions under a fragile minority government, and therefore any pressure on the BoJ to keep rates low is likely to be limited by political constraints, particularly as currency depreciation can negatively impact the administration’s approval ratings.

The BoE, conversely, delivered a 25bps cut to 3.75% in a narrow 5-4 decision. Officials cited the sharper-than-expected fall in November CPI alongside a cooling labour market and signs of stagnation as grounds for easing. Governor Bailey shifted from his previous hold stance to break the tie. However, Bailey was cautious when providing his outlook for further cuts, acknowledging that rates remain on a gradual downward pathway, but the pace of cuts is ambiguous and a ‘closer call’, with the central bank likely approaching the conclusion of its current easing cycle. The close vote and hawkish commentary for Governor Bailey allowed sterling to maintain strength following the cut.

The ECB kept its policy rate unchanged at its December meeting, with rates now having remained constant for over half a year and the economy showing resilience in the wake of Trump’s trade war. Updated staff projections lifted expected GDP growth for 2025-27 and revised up the 2026 inflation outlook as services prices are now expected to decline more slowly. President Lagarde reiterated that policy is “in a good place” but was reluctant to commit to a definite pathway, limiting the resulting FX impact in the aftermath of the meeting. All said, the euro enjoyed a strong month vs. the dollar but demonstrated mixed performance vs. risk-off FX.

N.B.: This summary includes market events and currency movements up to end-of-December.

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