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Last night's release of the Fed's Beige Book suggests the US economy is doing fine and there is no urgency for the Fed to cut rates. That provides some underlying support for the dollar. But investors continue to look for opportunities outside the US, with seemingly strong flows into EM equities at the start of the year. This all makes for a choppy FX story.
 

USD: Fed will be in no hurry to cut rates

Where the frantic geopolitical opening to 2026 connects with financial markets has largely been in the energy space. The latest swing here was a 5% drop in Brent crude last night as President Trump seemed to step back from imminent military action in Iran. These swings serve as a reminder that investors remain reluctant to chase new themes emerging from Washington on fears of policy reversal. That is probably the reason that the dollar and Treasuries have not sold off on the legal investigation into Fed Chair Powell.

Ultimately, however, we think this attack on the Fed will add to the case for de-dollarisation. On that subject, tonight sees the release of the US Treasury TIC data for November. Foreigners only net sold US portfolio assets in the single month of April last year, and last year's 10% dollar sell-off was a function of hedge adjustments, not outright asset sales. Still, we will want to see what the official sector is doing with Treasury holdings, where China has downsized in four of the last six reporting months.

Adding to the choppy environment has been seemingly good demand for EM assets. Looking at one of the largest EM ETFs, the iShares Core MSCI EM, last week saw the single largest inflow since 2021. The cross-current of investors wanting to diversify their concentration risk away from the US tech sector is perhaps one headwind why the dollar is not a little stronger right now.

Returning to the domestic US story, last night's release of the Fed's Beige Book suggests the central bank will be in no hurry to cut. Activity was flat to higher in eight of the 12 Fed districts, and there was no sign of any deterioration in the labour markets. Having pushed expectations of Fed policy easing this year back to a cut in June and then December, the next move in the rates market could be to price out the second Fed rate cut this year – a dollar positive.

On today's calendar, we have the weekly jobless claims calendar (expected at a low 215k) and a few Fed speakers (Goolsbee, Bostic and Barkin) – none of which look likely to move the needle on the Fed story. We see DXY staying gently bid in a 98-100 range for the next couple of weeks (perhaps for a couple of months too) until the attractive draw of overseas economies starts to sap the dollar from the second quarter onwards.

'Choppy' is how we have described FX markets in our latest FX Talking.
 

EUR: Waiting on the European growth engine

At 0900 CET today, we will get the first release of full-year German GDP growth for 2025. We and consensus expect a 0.2% figure after last year's 0.5% contraction. The good news is that we expect German growth to build sequentially in 2026, delivering a full-year figure of 0.9%. We will also see the release of November industrial production data for the euro area. This should deliver another healthy 0.5% month-on-month increase after an earlier 0.8% increase. That should maintain the narrative that European industry is on the mend and could provide some support to the euro.

EUR/USD traded volatility remains near multi-year lows, and we cannot see any immediate catalysts to reverse this. EUR/USD grinding towards 1.1600 looks unlikely to change this either.
 

GBP: Correction may have further to run

The UK delivered a positive set of data this morning, including a higher-than-expected monthly GDP figure for November and stronger than expected industrial production figures. A little earlier, we also had some positive news on the housing market, where estate agents are becoming a little more optimistic about sales.

This is all happening at a time when asset managers are still running some reasonably large underweight positions in sterling. We think the sterling correction we have seen since November probably has a little further to run, especially with the risk of an upside surprise in December UK CPI released next week.

Given the positioning, we think EUR/GBP support at 0.8645/55 looks vulnerable and the risks are building towards a breakdown to 0.8600 next week. Down there should be a good opportunity to hedge against sterling weakness in March, when we expect the Bank of England to deliver its next cut. For reference, money markets currently price the next cut in April and then again by December. We are looking at March and June for cuts.
 

PLN: No cut but the story continues

The National Bank of Poland left rates unchanged at 4.00% yesterday, in line with survey expectations. However, market pricing was closer to a 50/50 probability, as we discussed here yesterday, and leaving rates unchanged sent a slightly hawkish signal. The NBP statement does not provide much explanation for why rates were left unchanged. We doubt we'll get much direction from today's presser, and we will have to wait for Governor Adam Glapinski to hear what he wants to say. However, our forecast remains unchanged at three 25bp cuts to 3.25% this year (March, May, September).

Despite how little we know from the NBP, the PLN curve seems the most fairly priced within CEE at the moment. If anything, we would expect more steepening given the economy's performance, fiscal stance and NBP being the most dovish central bank currently. EUR/PLN has little reason to move this year so far but the absence of any volatility is remarkable. However, only the governor can move FX depending on what bias we see today, and for now it is difficult to choose a direction.

Even though the NBP did not cut rates yesterday, that does not mean that rate cuts are over. On the other hand, it is not clear how long the NBP wants to wait for another rate cut. These remain questions for today's press conference.

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