Next week's market outlook: Non-farm payrolls will be the first shot fired, followed by inflation to determine the extent of the damage; the dollar's story may be reversed?
2025-12-12 20:55:41
The main theme in the current foreign exchange and interest rate markets remains the same: whether the pace of interest rate cuts (or hikes) by major central banks will be repriced by the market in a faster or slower manner. Although the Federal Reserve's December policy meeting has concluded, it did not provide a one-sided answer, but instead brought the "disagreements" to the forefront, putting pressure on the dollar after the decision.
More importantly, next week is packed with key events: the US November non-farm payrolls report and November consumer price index will be released one after another; the Bank of England and the European Central Bank will announce their interest rate decisions on Thursday (December 18); and the Bank of Japan will follow suit on Friday. The combined effect of data and policy signals will likely increase volatility. Trading logic also needs to shift from "guessing the direction" to "monitoring the difference between expectations and the path": whether the outcome meets expectations is only the first step; whether policy statements and future paths cause a shift in pricing will determine how far the market can go.
The Federal Reserve cut interest rates by 25 basis points as widely expected by the market, but the updated dot plot shows that it only points to one 25 basis point rate cut next year. On the surface, this is a hawkish rate cut: two members voted to keep rates unchanged, and six officials gave points suggesting a preference for not cutting rates this year.
However, when the timeframe is extended, the "binding force" of the dot plot actually decreases. The dot plot distribution in 2026 is very dispersed and almost uniform: four members advocate no rate cut in 2026, four advocate one rate cut, and four advocate two rate cuts. This means that the "median" in 2026 does not represent the consensus of the majority, but rather the arithmetic result of three equally supported viewpoints. For the market, this structure naturally expands the repricing space: the dot plot no longer acts like a rigid anchor, but rather like an "interpretable" range.
Meanwhile, the committee also announced it would begin purchasing short-term Treasury bills as part of its reserve management operations, aiming to support market liquidity and maintain control over interest rates. This new move, coupled with the relatively dovish statements at the press conference, became one of the triggers for the dollar's weakness. The chairman emphasized slowing job growth and uncertainty in the labor market, leading some investors to believe that the Fed may still need to cut interest rates twice next year. Thus, the apparent hawkishness of the dot plot and the "greater focus on employment" in the communication created tension, and it's not surprising that the dollar suffered in the short term due to this tension.
The importance of next week's US data lies in its potential to determine whether the "jobs first" policy will be further reinforced. The November non-farm payrolls report, delayed due to the shutdown, will be released on Tuesday, and the November consumer price index will be released on Thursday. Previously, private sector employment data was weak: the private sector lost 32,000 jobs in November, significantly lower than the market's previous expectation of an increase of 5,000 jobs. This discrepancy will push the non-farm payrolls risk further to the downside.
If non-farm payrolls data weakens significantly, the interest rate market could easily shift its pricing of two rate cuts next year to an earlier timeframe, and the dollar would be more likely to remain weak. In contrast, even if inflation data shows some stickiness, its marginal support for the dollar may be less than before, as the current focus is more on the labor market. Especially as mentioned in the press conference, the "overshooting" of the 2% inflation target is largely related to tariff factors and may be closer to a "one-off price increase," which would reduce the market's sensitivity to a single upward movement in inflation data.
Therefore, the more likely order of events is: non-farm payrolls will determine the direction first, followed by inflation to determine the magnitude and depth of the pullback. In addition, the preliminary December Purchasing Managers' Index will be released on Tuesday, and November retail sales will be released on Wednesday. These two data points can help assess the resilience of demand and economic momentum, but their impact on the interest rate path is likely to be less significant than that of non-farm payrolls and inflation.
The focus for the pound sterling isn't just on whether there will be an interest rate cut, but also on whether it will take a more dovish stance. At its November meeting, the Bank of England kept interest rates unchanged, but the vote was a close 5-4, with four members supporting a rate cut. Of the five who supported keeping rates steady, only the governor explicitly stated that overall inflation risks had decreased. This detail was interpreted by the market as a possible shift in the governor's stance towards a rate cut, thus foreshadowing the December decision. Post-meeting data reinforced this expectation: the unemployment rate rose from 4.8% to 5.0% in September, third-quarter economic growth slowed from 0.3% to 0.1%, and while both the overall and core consumer price indices remained above 3%, they both declined slightly. The market currently estimates a 90% probability of a rate cut, and an additional 25 basis point cut by December 2026 has not only been priced in but has already been "over-priced." Meanwhile, the Bank of England also assesses that Chancellor Reeves' latest budget plan could reduce the annual inflation rate by about 0.4 to 0.5 percentage points between the second quarter of 2025 and the end of 2026. If an interest rate cut is implemented next week with dovish wording, the pound is more likely to come under pressure; conversely, if an interest rate cut is implemented but it is emphasized that further observation is needed and that restraint will be exercised regarding the follow-up, it may trigger a "dovish expectation sell-off," bringing room for a phased rebound.
Regarding the euro, the European Central Bank (ECB) is more likely to remain on the sidelines, but whether its rhetoric continues to lean optimistically will directly affect the relative strength of the euro against the US dollar. Previously, the ECB reiterated that its policy was in a "good position," citing healthy signs of economic recovery and inflation nearing its target. Recent statements have also emphasized resilience: the ECB president mentioned that the Eurozone's resilience to trade frictions and its near-potential growth performance may prompt an upward revision of economic growth forecasts at this meeting; meanwhile, some management members suggested that the next step might be an interest rate hike, but not in the short term. Against this backdrop, the market generally expects the ECB to hold rates steady this week, and has priced in a probability of about 36% for a rate hike by the end of next year. If the ECB continues to emphasize that "the economy is resilient and there is no need for a sudden shift in policy stance," the euro will be more likely to receive support; conversely, if its statements are more cautious and it shows more confidence in the decline in inflation, the market may lower its estimate of a 36% probability of a rate hike by the end of next year, and the euro's flexibility will be compressed.
The Japanese yen and the Bank of Japan (BOJ) face a greater challenge in distinguishing between "realization" and "guidance." The market currently prices in a 75% chance of a December rate hike by the BOJ; for next year, the market has already priced in a rate hike of approximately 40 basis points, roughly equivalent to a 25 basis point hike plus another rate hike with a probability of about 60%. It's worth noting that even with the rebound in hawkish bets, the yen hasn't benefited significantly, indicating that the trading focus is more on "realizing the news and then looking at the guidance": if the rate hike proceeds as expected, but the pace in 2026 suggests it won't keep up with the market's accumulated hawkish expectations, the yen may instead experience "weakening after the positive news is realized"; only when the guidance further strengthens the subsequent tightening pace will the yen be more likely to see a more sustainable recovery.
More importantly, next week is packed with key events: the US November non-farm payrolls report and November consumer price index will be released one after another; the Bank of England and the European Central Bank will announce their interest rate decisions on Thursday (December 18); and the Bank of Japan will follow suit on Friday. The combined effect of data and policy signals will likely increase volatility. Trading logic also needs to shift from "guessing the direction" to "monitoring the difference between expectations and the path": whether the outcome meets expectations is only the first step; whether policy statements and future paths cause a shift in pricing will determine how far the market can go.
Federal Reserve: Behind a "hawkish rate cut" lies the tension between divergence and operational signals.
The Federal Reserve cut interest rates by 25 basis points as widely expected by the market, but the updated dot plot shows that it only points to one 25 basis point rate cut next year. On the surface, this is a hawkish rate cut: two members voted to keep rates unchanged, and six officials gave points suggesting a preference for not cutting rates this year.
However, when the timeframe is extended, the "binding force" of the dot plot actually decreases. The dot plot distribution in 2026 is very dispersed and almost uniform: four members advocate no rate cut in 2026, four advocate one rate cut, and four advocate two rate cuts. This means that the "median" in 2026 does not represent the consensus of the majority, but rather the arithmetic result of three equally supported viewpoints. For the market, this structure naturally expands the repricing space: the dot plot no longer acts like a rigid anchor, but rather like an "interpretable" range.
Meanwhile, the committee also announced it would begin purchasing short-term Treasury bills as part of its reserve management operations, aiming to support market liquidity and maintain control over interest rates. This new move, coupled with the relatively dovish statements at the press conference, became one of the triggers for the dollar's weakness. The chairman emphasized slowing job growth and uncertainty in the labor market, leading some investors to believe that the Fed may still need to cut interest rates twice next year. Thus, the apparent hawkishness of the dot plot and the "greater focus on employment" in the communication created tension, and it's not surprising that the dollar suffered in the short term due to this tension.
US Data Week: Non-farm payrolls set the direction, while inflation is more like "setting the magnitude".
The importance of next week's US data lies in its potential to determine whether the "jobs first" policy will be further reinforced. The November non-farm payrolls report, delayed due to the shutdown, will be released on Tuesday, and the November consumer price index will be released on Thursday. Previously, private sector employment data was weak: the private sector lost 32,000 jobs in November, significantly lower than the market's previous expectation of an increase of 5,000 jobs. This discrepancy will push the non-farm payrolls risk further to the downside.
If non-farm payrolls data weakens significantly, the interest rate market could easily shift its pricing of two rate cuts next year to an earlier timeframe, and the dollar would be more likely to remain weak. In contrast, even if inflation data shows some stickiness, its marginal support for the dollar may be less than before, as the current focus is more on the labor market. Especially as mentioned in the press conference, the "overshooting" of the 2% inflation target is largely related to tariff factors and may be closer to a "one-off price increase," which would reduce the market's sensitivity to a single upward movement in inflation data.
Therefore, the more likely order of events is: non-farm payrolls will determine the direction first, followed by inflation to determine the magnitude and depth of the pullback. In addition, the preliminary December Purchasing Managers' Index will be released on Tuesday, and November retail sales will be released on Wednesday. These two data points can help assess the resilience of demand and economic momentum, but their impact on the interest rate path is likely to be less significant than that of non-farm payrolls and inflation.
British Pound, Euro, Japanese Yen: Different Central Bank "Attitudes" Determine Relative Strength
The focus for the pound sterling isn't just on whether there will be an interest rate cut, but also on whether it will take a more dovish stance. At its November meeting, the Bank of England kept interest rates unchanged, but the vote was a close 5-4, with four members supporting a rate cut. Of the five who supported keeping rates steady, only the governor explicitly stated that overall inflation risks had decreased. This detail was interpreted by the market as a possible shift in the governor's stance towards a rate cut, thus foreshadowing the December decision. Post-meeting data reinforced this expectation: the unemployment rate rose from 4.8% to 5.0% in September, third-quarter economic growth slowed from 0.3% to 0.1%, and while both the overall and core consumer price indices remained above 3%, they both declined slightly. The market currently estimates a 90% probability of a rate cut, and an additional 25 basis point cut by December 2026 has not only been priced in but has already been "over-priced." Meanwhile, the Bank of England also assesses that Chancellor Reeves' latest budget plan could reduce the annual inflation rate by about 0.4 to 0.5 percentage points between the second quarter of 2025 and the end of 2026. If an interest rate cut is implemented next week with dovish wording, the pound is more likely to come under pressure; conversely, if an interest rate cut is implemented but it is emphasized that further observation is needed and that restraint will be exercised regarding the follow-up, it may trigger a "dovish expectation sell-off," bringing room for a phased rebound.
Regarding the euro, the European Central Bank (ECB) is more likely to remain on the sidelines, but whether its rhetoric continues to lean optimistically will directly affect the relative strength of the euro against the US dollar. Previously, the ECB reiterated that its policy was in a "good position," citing healthy signs of economic recovery and inflation nearing its target. Recent statements have also emphasized resilience: the ECB president mentioned that the Eurozone's resilience to trade frictions and its near-potential growth performance may prompt an upward revision of economic growth forecasts at this meeting; meanwhile, some management members suggested that the next step might be an interest rate hike, but not in the short term. Against this backdrop, the market generally expects the ECB to hold rates steady this week, and has priced in a probability of about 36% for a rate hike by the end of next year. If the ECB continues to emphasize that "the economy is resilient and there is no need for a sudden shift in policy stance," the euro will be more likely to receive support; conversely, if its statements are more cautious and it shows more confidence in the decline in inflation, the market may lower its estimate of a 36% probability of a rate hike by the end of next year, and the euro's flexibility will be compressed.
The Japanese yen and the Bank of Japan (BOJ) face a greater challenge in distinguishing between "realization" and "guidance." The market currently prices in a 75% chance of a December rate hike by the BOJ; for next year, the market has already priced in a rate hike of approximately 40 basis points, roughly equivalent to a 25 basis point hike plus another rate hike with a probability of about 60%. It's worth noting that even with the rebound in hawkish bets, the yen hasn't benefited significantly, indicating that the trading focus is more on "realizing the news and then looking at the guidance": if the rate hike proceeds as expected, but the pace in 2026 suggests it won't keep up with the market's accumulated hawkish expectations, the yen may instead experience "weakening after the positive news is realized"; only when the guidance further strengthens the subsequent tightening pace will the yen be more likely to see a more sustainable recovery.
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