Market news & insights

Global markets are calm but alert in response to the US–Venezuela situation, with US and European equities holding near or testing record levels.

Gains in energy, defence and materials suggest selective positioning. Modest strength in gold and lower yields is indicative of hedging rather than market fear, with oil prices remaining muted.

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Quick facts

• US and European equity indices are holding near record highs despite geopolitical headlines. Volatility remains low through the trading session.
• Energy and defence stocks are leading gains, with materials stocks responding to mild gains in previous metals, reflecting selective risk positioning.
• Gold is edging higher, and government bond yields have dipped slightly, signalling mild hedging.
• Oil prices remain range-bound, suggesting no immediate supply shock is being priced in.
• Markets could be sensitive to further geopolitical developments, with any escalation a major potential risk to sentiment.

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US–Venezuela tensions escalation has prompted heightened geopolitical scrutiny across the globe, not only related to this action itself but other geopolitical longer-term implications. 

There has been a muted and measured response across global financial markets so far, with little significant negative impact evident for now. 

Some sectors have had noteworthy gains, whilst the impact on other asset classes has again been calm.

US equities 

What’s happening:

US equity markets are showing resilience, with the S&P 500 holding near recent highs and the Dow Jones Industrial Average up 1.23%, pushing into fresh record territory.

What to watch:

• If US indices continue to hold above recent breakout levels, then markets are reinforcing the view that geopolitical risk remains manageable.
• Rising volatility, if seen in the VIX index, may indicate that sentiment may be shifting from selective risk-taking to broader caution.

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European equities

What’s happening:‍

European markets are modestly higher, with the DAX trading at record levels and the FTSE 100 closing over 10,000 for the first time.

What to watch:

• For now, European indices appear to be tracking US strength, suggesting investors are viewing the event as externally contained. Similar sectors are performing well, as seen in overnight US equity performance. 
• It is unlikely that we will see any specific regional response, though tensions related to the US administration's narrative around Greenland is noteworthy.

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Specific sector moves

‍Energy stocks

What’s happening:‍

Energy stocks are leading equity gains across the US (e.g. Chevron Corp – CVX up 5.1%), and European markets, with the potential for increased influence in Venezuela of US oil companies.

What to watch:

• While energy equities outperform while oil prices remain range-bound, then markets are pricing geopolitical caution rather than immediate disruption. If this is accompanied by a rise in crude prices rise together, then it may be indicative of supply risk
  

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Defence stocks

What’s happening:‍

Defence stocks are attracting some investor interest. (E.g. Lockheed Martin – LMT up 2.92%, General Dynamics – GD up  3.54%).

What to watch:

• Continued outperformance with other sector equity drawdowns may be indicative of some escalation concerns.

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‍Materials & miners

What’s happening:‍

Materials and mining stocks are finding support alongside modest gains in precious metals and record highs in copper. The S&P Metals & Mining ETF – XME closed 3.28% up.

What to watch:

• Ongoing materials strength alongside stable growth indicators, then the current move may reflect real-asset demand rather than simply a hedging approach. If gold accelerates higher while base metals fail to follow, then investor defensive positioning may be overtaking confidence in growth.

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Crude oil

What’s happening:‍

Oil prices remain subdued, with the futures trading at $58.40, within recent ranges, despite the unfolding geopolitical situation. 

What to watch:

• Venezuelan influence on global oil production is not substantial enough on its own to create any major issues in the short term with global oil supply at high levels.
• As a result, the impact is more likely to remain muted, but any significant rises in oil price across multiple sessions may be indicative of some market concerns related to increases in geopolitical-influenced supply expectations.

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Gold

What’s happening:‍

Gold prices are currently edging higher towards all-time highs, reflecting a modest safe-haven play. The closing price for Gold futures is $4454, breaching the psychologically important $4400.

What to watch:

• If gold continues to rise gradually while equities remain firm, then the move reflects a standard hedging approach to assets rather than fear. 
• A spike in gold price alongside falling equities and rising volatility, maybe a signal that market risk may be increasing.

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Treasury yields

What’s happening:‍

Yields have eased slightly, indicating a potential selective defensive positioning in asset choice by institutional investors. (10-year Treasury yields at 4.153%, down 0.36%)

What to watch:

• If yields should fall sharply alongside equity weakness, then markets may be shifting toward a risk-off approach.

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What to watch next

• If asset-class correlations remain contained, then markets are maintaining confidence in the broader macro backdrop. 
• If tensions escalate into broader regional instability or prolonged policy responses, Sharp movements across equities, bonds, and commodities may signify a reassessment of risk.
• If geopolitical developments fail to translate into sustained price dislocation, then the current response is likely to fade.

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(All prices quoted correct as of 4.30pm NY time after market close).

January’s market action often matters more than simply marking the opening of the calendar year. Institutional positioning resets, testing of economic assumptions, and early price moves reflect how market participants interpret the first meaningful signals of the year.

While January rarely determines full-year outcomes, it frequently shapes the narratives markets carry into the first quarter (Q1).

Four critical levers: growth, labour, inflation, and policy, can provide an early indication of how markets are processing and prioritising incoming information.

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Growth: manufacturing PMIs

January’s first growth test comes from the manufacturing surveys, with markets watching whether signals from S&P Global Manufacturing PMI and ISM Manufacturing PMI tell a consistent story.

Key dates:

• ISM Manufacturing PMI: 5 January, 10:00 AM (ET)/ 6 January, 1:00 AM (AEDT)

What markets look for:

Attention often centres on new orders as a forward-looking indicator of demand, alongside prices paid for early insight into cost pressures.

Broad strength across both surveys would support the narrative that the growth momentum seen toward the end of 2025 may extend into early 2026, easing some concerns about a sharper slowdown. Weaker or conflicting readings would keep the growth outlook uncertain, rather than decisively negative.

How it tends to show up in markets:

Firmer growth signals often appear first in higher short-dated Treasury yields. Rising yields can tighten financial conditions, weigh on equity valuations, and support the USD, with spillover effects across foreign exchange (FX) and commodity markets.

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Labour: job openings and payrolls

While early-January Non-Farm Payrolls (NFP) often drive short-term volatility, JOLTS job openings may be more influential in shaping January’s policy narrative.

Key dates:

• JOLTS Job Openings: 7 January, 10:00 AM (ET)/ 8 January, 1:00 AM (AEDT)
• Non-Farm Payrolls (NFP): 9 January, 8:30 AM (ET)/ 10 January, 12:30 AM (AEDT)

What markets look for:

Markets often treat JOLTS as a clearer indicator of underlying labour demand than month-to-month hiring flows.

A continued drift lower in openings would support the view that labour demand is easing in an orderly way, reinforcing confidence that inflation pressures can continue to moderate. A rebound or stalled decline would suggest labour conditions remain firmer than expected.

Market sensitivities:

For markets, easing labour demand typically supports lower short-dated yields and a softer USD, while persistent tightness can push yields higher, strengthen the USD, and increase volatility across rate-sensitive assets.

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Inflation: PPI and CPI

Key Dates:

• PPI: 14 January, 8:30 AM (ET)/ 15 January, 12:30 AM (AEDT)
• CPI (December 2025 data): 15 January, 8:30 AM (ET)/ 16 January, 12:30 AM (AEDT)

The inflation signal can be read as a pipeline from producer prices to consumer inflation. Markets are watching whether producer-level cost pressures continue to fade or begin to re-emerge.

What markets look for:

Core PPI, particularly services-linked components, provides an early indication of cost momentum. Core CPI breadth may help determine whether inflation is continuing to cool or showing signs of persistence.

A softer pipeline would reinforce confidence that disinflation can extend into early 2026, increasing the scope for a potential March policy adjustment. Stickier CPI readings above 3% would raise questions about the durability of recent progress.

How rates and the USD often react

Market reaction tends to be led by yields. Cooling inflation pressure usually pulls short-dated yields lower and softens the USD, while persistent inflation risks can push yields higher and tighten financial conditions.

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Policy: January FOMC meeting

By the time the Federal Reserve meets at the end of January, markets will have processed the early growth, labour, and inflation signals of the year.

Key Dates:

• FOMC rate decision: 29 January, 2:00 PM (ET)/ 30 January, 6:00 AM (AEDT)

What markets look for:

A policy change is unlikely this month, but how those signals are framed in the statement and press conference still matters. With January cut expectations priced well below 20%, attention is on whether expectations for a March move, currently around 50%, begin to shift.

Confidence that inflation and labour pressures are easing would typically support lower yields and a softer USD. A more cautious tone could lift yields, strengthen the USD, and tighten global financial conditions.

Putting it all together

January’s data acts as condition-setters rather than decision points. The practical takeaway lies in how markets respond as those conditions become clearer:

If growth and labour soften while inflation continues to ease, markets may lean toward a more constructive risk backdrop, with Treasury yields remaining the key guide and expectations for policy easing later in Q1 firming.

If growth holds up and inflation proves sticky, a more cautious posture may be warranted, with heightened sensitivity to Treasury yields, USD strength, and pressure on equity valuations and rate-sensitive commodities.

Asia starts the week with a fresh geopolitical shock that is already being framed in oil terms, not just security terms. The first-order move may be a repricing of risk premia and volatility across energy and macro, while markets wait to see whether this becomes a durable physical disruption or a fast-fading headline premium.

At a glance

• What happened: US officials said the US carried out “Operation Absolute Resolve”, including strikes around Caracas, and that Venezuela’s President Nicolás Maduro and his wife were taken into US custody and flown to the United States (subject to ongoing verification against the cited reporting).
• What markets may focus on now: Headline-driven risk premia and volatility, especially in products and heavy-crude-sensitive spreads, rather than a clean “missing barrels” shock.
• What is not happening yet: Early pricing has so far looked more like a headline risk premium than a confirmed physical supply shock, though this can change quickly, with analysts pointing to ample global supply as a possible cap on sustained upside.
• Next 24 to 72 hours: Market participants are likely to focus on the shape of the oil “quarantine”, the UN track, and whether this stays “one and done” or becomes open-ended.
• Australia and Asia hook: AUD as a risk barometer, Asia refinery margins in diesel and heavy, and shipping and insurance where the price can show up in friction before it shows up in benchmarks.

What happened, facts fast

Before anyone had time to workshop the talking points, there were strikes, there was a raid, and there was a custody transfer. US officials say the operation culminated in Maduro and his wife being flown to the United States, where court proceedings are expected.

Then came the line that turned a foreign policy story into a markets story. President Trump publicly suggested the US would “run” Venezuela for now, explicitly tying the mission to oil.

Almost immediately after that came a message-discipline correction. Secretary of State Marco Rubio said the US would not govern Venezuela day to day, but would press for changes through an oil “quarantine” or blockade.

That tension, between maximalist presidential rhetoric and a more bureaucratically describable “quarantine”, is where the uncertainty lives. Uncertainty is what gets priced first.

Why this is price relevant now

What’s new versus known for positioning

What’s new, and price relevant, is that the scale and outcome are not incremental. A major military operation, a claimed removal of Venezuela’s leadership from the country, and a US-led custody transfer are not the sort of things markets can safely treat as noise.

Second, the oil framing is explicit. Even if you assume the language gets sanded down later, the stated lever is petroleum. Flows, enforcement, and pressure via exports.

Third, the embargo is not just a talking point anymore. Reporting says PDVSA has begun asking some joint ventures to cut output because exports have been halted and storage is tightening, with heavy-crude and diluent constraints featuring prominently.

What’s still unknown, and where volatility comes from

Key unknowns include how strict enforcement is on water, what exemptions look like in practice, how stable the on-the-ground situation is, and which countries recognise what comes next. Those are not philosophical questions. Those are the inputs for whether this is a temporary risk premium or a durable regime shift.

Political and legal reaction, why this drives tail risk

The fastest way to understand the tail here is to watch who calls this illegal, and who calls it effective, then ask what those camps can actually do.

Internationally, reaction has been fast, with emphasis on international law and the UN Charter from key partners, and UN processes in view. In the US, lawmakers and commentators have begun debating the legal basis, including questions of authority and war powers. That matters for markets because it helps define whether this is a finite operation with an aftershock, or the opening chapter of a rolling policy regime that keeps generating headlines.

Market mechanism, the core “so what”

Here’s the key thing about oil shocks. Sometimes the headline is the shock. Sometimes the plumbing is the shock.

Volumes and cushion

Venezuela is not the world’s swing producer. Its production is meaningful at the margin, but not enough by itself to imply “the world runs out of oil tomorrow”. The risk is not just volume. It is duration, disruption, and friction.

The market’s mental brake is spare capacity and the broader supply backdrop. Reporting over the weekend pointed to ample global supply as a likely cap on sustained gains, even as prices respond to risk.

Quality and transmission

Venezuela’s barrels are disproportionately extra heavy, and extra heavy crude is not just “oil”. It is oil that often needs diluent or condensate to move and process. That is exactly the kind of constraint that shows up as grade-specific tightness and product effects.

Reporting has highlighted diluent constraints and storage pressure as exports stall. Translation: even if Brent stays relatively civil, watch cracks, diesel and distillates, and any signals that “heavy substitution” is getting expensive.

Products transmission, volatility first, pump later

If crude is the headline, products are the receipt, because products tell you what refiners can actually do with the crude they can actually get. The short-run pattern is usually: futures reprice risk fast, implied volatility pops; physical flows adapt more slowly; retail follows with a lag, and often with less drama than the first weekend of commentary promised.

For Australia and Asia desks, the bigger point is transmission. Energy moves can influence inflation expectations, which can feed into rates pricing and the dollar, and in turn affect Asia FX and broader risk, though the links are not mechanical and can vary by regime.

Some market participants also monitor refined-product benchmarks, including gasoline contracts such as reformulated gasoline blendstock, as part of that chain rather than as a stand-alone signal.

Historical context, the two patterns that matter

Two patterns matter more than any single episode.

Pattern A: scare premium. Big headline, limited lasting outage. A spike, then a fade as the market decides the plumbing still works.

Pattern B: structural. Real barrels are lost or restrictions lock in; the forward curve reprices; the premium migrates from front-month drama to whole-curve reality.

One commonly observed pattern is that when it is only premium, volatility tends to spike more than price. When it is structural, levels and time spreads move more durably.

The three possible market reactions

Contained, rhetorical: quarantine exists but porous; diplomacy churns; no second-wave actions. Premium bleeds out; volatility mean-reverts.

Embargo tightens, exports curtailed, quality shock: enforcement hardens; PDVSA cuts deepen; diluent constraints bite. Heavies bid; cracks and distillates react; freight and insurance add friction.

Escalation, prolonged control risk: “not governing” language loses credibility; repeated operations; allies fracture further. Longer-duration premium; broader risk-off impulse across FX and rates.

Australia and Asia angle

For Sydney, Singapore, and Hong Kong screens, this is less about Venezuelan retail politics and more about how a Western Hemisphere intervention bleeds into Asia pricing.

AUD is the quick and dirty risk proxy. Asia refiners care about the kind of oil and the friction cost. Heavy crude plus diluent dependency makes substitution non-trivial. If enforcement looks aggressive, the “price” can show up in freight, insurance, and spreads before it shows up in headline Brent.

Catalyst calendar, key developments markets may monitor

• US policy detail: quarantine rules, enforcement posture, exemptions.
• UN and allies: statements that signal whether this becomes a long legitimacy fight.
• PDVSA operations: storage, shut-ins, diluent availability, floating storage signals.
• OPEC+ signalling: whether the group stays committed to stability if spreads blow out.

In 2025, the S&P 500 traded around 6,835 and was up approximately 16% year to date (YTD). Market direction remained most sensitive to Federal Reserve expectations, inflation data and the earnings outlook, with returns also shaped by mega-cap tech leadership and the broader AI narrative. The index pulled back from earlier December highs, but it has so far held above key major moving averages (MA).

Key 2025 drivers included:

• ‍Fed expectations and inflation: Inflation cooled through the year but remained sticky around 2.5% to 3%. A Fed easing bias likely supported price to earnings (P/E) multiples and “risk-on” positioning. More recently, markets appeared increasingly rate-sensitive, with the decreased likelihood of an additional rate cut until March 2026.
• ‍Earnings and guidance: Corporate earnings remained strong quarter on quarter. Recent Q3 results reportedly saw over 80% of the S&P 500 beat earnings per share (EPS) expectations. For Q4, the estimated year-over-year earnings growth rate is 8.1%, despite ongoing concerns around import tariffs and potential margin pressure.
• ‍Index leadership and breadth: Returns were heavily influenced by mega-cap tech and AI beneficiaries, even as broader market breadth appeared less consistent at points through the year.
• ‍Policy headlines and volatility: Trade and tariff headlines drove sharp moves, particularly earlier in the year. Some investors pointed to the “TACO” trade, with rapid recoveries after policy proposals were softened. Over time, similar shocks appeared to have less impact as the market became somewhat desensitised.
• ‍Valuations and sensitivity: The forward 12-month P/E ratio for the S&P 500 is 22, above the 5-year average (20.0) and above the 10-year average (18.7). That gap kept valuation sensitivity, especially in AI-linked names, firmly in focus.

Current state

The S&P 500 is about 1% below record highs hit earlier in December. That could indicate the broader uptrend remains in place, with a move back toward the recent highs one possible scenario if momentum improves. Despite the recent retracement, the index remains above all key major moving averages (MA). The latest bounce followed lower than expected CPI numbers earlier this week, alongside continued, and to some, surprising optimism about what may come next.

What to watch in January

• ‍Q4 earnings from mid-January: Results and guidance may help clarify whether valuations are being supported by forward expectations.
• ‍AI narrative and positioning: With AI-linked mega-caps carrying a large share of market capitalisation, changes in sentiment or expectations could have an outsized impact on index performance.
• ‍US jobs and CPI data: The latest US jobs report reportedly points to the highest headline unemployment rate since 2021. Cooling inflation this week may keep markets alert to shifts in rate cut timing, particularly around the March decision.

S&P 500 daily chart

Major FX pairs

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AUD/USD

AUD/USD has been choppy in 2025. Since the “redemption day” drop in April, the move has looked more like a steady grind higher than a clean upside trend.

Key levels
Recent peaks in early September and mid-December highlight resistance near 0.6625. Support has been evident around 0.6425, where price bounced over the last month.

What is supporting the bounce
That support test coincided with stronger than expected jobs and inflation data, lifting expectations that the Reserve Bank of Australia (RBA) may raise rates during 2026 rather than cut again. The latest pullback looks contained so far, with buying interest already visible and price still above key longer-term moving averages.

What could drive a breakout
The pair remains range-bound, but the tilt is still constructive. If Chinese data stays firm, metals prices hold up, and the central bank outlook remains relatively hawkish, a break above resistance could gain more traction.

AUD/USD daily chart

EUR/USD

After early 2025 euro strength, EUR/USD has mostly consolidated since June in a roughly 270 pip range. This month tested 1.18 resistance, reaching highs not seen since September.

What price is doing now
The recent pullback still lacks strong downside conviction. Some technical analysts refer to the 1.17 area as a near-term reference level.

What could come next
If price holds 1.17 and buyers step back in, another push toward 1.18 is possible. One view is that the European Central Bank (ECB) could be less inclined to ease in 2026, which could be consistent with a firmer EUR/USD scenario. Broader analyst commentary also suggests the euro may stall rather than collapse against the US dollar, although outcomes remain data and policy dependent.

EUR/USD daily chart

USD/JPY

Year-to-date picture
USD/JPY is close to flat overall for the year. After US dollar weakness in Q1, the pair reversed higher and now sits just below resistance near 158.

Rates remain the main driver
Rate differentials still favour the US dollar. The Bank of Japan (BOJ) held steady for much of the period despite expectations it might act, and the recent rate increase was modest. Policy has only moved marginally away from zero.

What could shift the balance
Rate differentials remain a key influence. Without a clearer shift in BOJ policy, the JPY may find it difficult to sustain a rebound. Some market commentators cite 154.20 as a chart reference level.

USD/JPY daily chart

In 2025, the ASX 200 closed around 8,621 points and was up approximately 6% year to date (YTD) as of 19 December close. Market direction was most sensitive to Reserve Bank of Australia (RBA) expectations, commodity prices and China-linked demand, and (to a lesser extent) moves in the Australian dollar (AUD). The index recovered from November’s pullback, but remained below October’s record close.

Key 2025 drivers included:

• RBA policy expectations: Sentiment was shaped by shifting views on the timing and extent of rate moves. The November pullback reflected repricing towards a longer pause and higher uncertainty around whether the next move could be a hike rather than a cut, particularly as jobs and inflation data surprised.
• Resources and China sensitivity: With a meaningful resources weight, the index responded to iron ore stability, strong gold prices and relative firmness in base metals. China data and any perceived policy support (including signals from the People’s Bank of China (PBOC)) remained important for the export backdrop. A relatively stable AUD also reduced currency-related noise for exporters.
• Index composition and market structure: The ASX 200’s heavier tilt to materials and banks, and lower exposure to high-growth technology, meant it often lagged tech-led global rallies, but tended to hold up better when AI and growth valuations were questioned.
• Corporate earnings: Reporting season outcomes influenced valuation support. In September’s half-year reporting season, around 33% of ASX 200 companies beat expectations, which helped underpin pricing around current levels.

Current state

The ASX 200 was roughly 5% below its late-October record high close of 9,094 points. After the November retracement, support around 8,400 appeared to hold and buying interest improved. The 50-day EMA near 8,730 (a prior consolidation area) was a commonly watched near-term reference, noting technical indicators can be unreliable.

What to watch in January

• China and commodity demand: Growth, trade and any fresh stimulus inference from the PBOC may affect sentiment.
• Domestic inflation and labour data: CPI and jobs prints are key inputs into RBA expectations.
• Key levels and follow-through: The post-November rebound may need continued demand to sustain momentum.

What moved the Nikkei 225 in 2025?

In 2025, the Nikkei 225 traded around 39,200 points and was up approximately 21% year to date (YTD). Market direction was most sensitive to moves in the Japanese yen (JPY) and Bank of Japan (BOJ) communication, with the index consolidating after multi-decade highs. While broader signals remained constructive, consolidation can resolve either higher or lower.

Key influences included:

• JPY movements and earnings translation: A weaker JPY can boost the reported value of overseas earnings for some exporters, although it may also increase input and import costs. The net impact often depends on company hedging practices and varies by sector, with effects most evident in export-heavy industries such as automotive, industrials and parts of technology manufacturing.
• Gradual BOJ policy transition: The BOJ continued to step away from ultra-easy settings, but tightening was generally cautious. Markets largely priced a slow, conditional normalisation, which helped limit downside, even as policy headlines created bouts of volatility.
• Corporate governance reforms: Ongoing improvements in capital efficiency and shareholder returns supported interest from overseas investors. Share buybacks, stronger balance-sheet discipline and improved return on equity (ROE) contributed to re-rating in parts of the market.
• Global cyclical exposure: The Nikkei moved with shifts in global manufacturing sentiment and expectations for US growth, particularly during risk-on phases associated with AI-related capital spending.

Current state

After pushing to multi-decade highs earlier in the year, the Nikkei spent time consolidating but has remained structurally strong. Price sits above key long-term moving averages, and some technicians watch the 50-day exponential moving average (EMA) as a potential reference level (noting these indicators can be unreliable). Currency swings and shifting BOJ expectations were commonly cited as contributors to much of the second-half volatility, although pullbacks were generally met with buying interest.

What to watch in January for Japan

• JPY volatility: Sharper yen moves, especially if driven by BOJ or Federal Reserve expectations, could quickly change exporter earnings assumptions.
• BOJ communication: Small changes in language on inflation persistence or bond market operations may move sentiment.
• Global growth data: US and China manufacturing and trade prints remain key inputs for an externally focused economy.

2025 has seen a material decline in the fortunes of the greenback. A technical structure breakdown early in the year was followed by a breach of the 200-day moving average (MA) at the end of Q1. The index then entered correction territory, printing a three-year low at the end of Q2.

Since then, we have seen attempts to build a technical base, including a re-test of the end-of-June lows in mid-September. However, buying pressure has not been strong enough to push price back above the technically critical and psychologically important 100 level.

What the levels suggest from here

As things stand, the index remains more than 10% lower for 2025. On this technical view, the index may revisit the 96 area. However, technical levels can fail and outcomes depend on multiple factors.

US dollar index

The key question for 2026

The key question remains: are we likely to see further losses in the early part of next year and beyond, or will current support hold?

We cannot assess the US dollar in isolation and any outlook is shaped by internal and global factors, not least its relative strength versus other major currencies. Many of these drivers are interrelated, but four potential headwinds stand out for any US dollar recovery. Collectively, they may keep downside pressure in play.

Four headwinds for any US dollar recovery

1. The US dollar as a safe-haven trade

One scenario where US dollar support has historically been evident is during major global events, slowdowns and market shocks. However, the more muted response of the US dollar during risk-off episodes this year suggests a shift away from the historical norm, with fewer sustained US dollar rallies.

Instead, throughout 2025, some investors appeared to favour gold, and at other times, FX and even equities, rather than into the US dollar. If this change in behaviour persists through 2026, it could make recovery harder, even if global economic pressure builds over the year ahead.

2. US versus global trade

Trade policy is harder to measure objectively, and outcomes can be difficult to predict. That said, trade battles driven by tariffs on US imports are often viewed as an additional potential drag on the US dollar.

The impact may be twofold if additional strain is placed on the US economy through:

• a slowdown in global trade volumes as impacted countries seek alternative trade relationships, with supply chain distortions that may not favour US growth
  
• pressure on US corporate profit margins as tariffs lift costs for importers
  

3. Removal of quantitative tightening

The Fed formally halted its balance sheet reduction, quantitative tightening (QT), as of 1 December 2025, ending a program that shrank assets by roughly US$2.4 trillion since mid-2022.

Traditionally, ending QT is seen as marginally negative for the US dollar because it stops the withdrawal of liquidity, can ease global funding conditions, and may reduce the scarcity that can support dollar demand. Put simply, more dollars in the system can soften the currency’s support at the margin, although outcomes have varied historically and often depend on broader financial conditions.

4. Interest rate differential

Interest rate differential (IRD) is likely to be a primary driver of US dollar strength, or otherwise, in the months ahead. The latest FOMC meeting delivered the expected 0.25% cut, with attention on guidance for what may come next.

Even after a softer-than-expected CPI print, markets have been reluctant to price aggressive near-term easing. At the time of writing, less than a 20% chance of a January cut is priced in, and it may be March before we see the next move.

The Fed is balancing sticky inflation against a jobs market under pressure, with the headline rate back at levels last seen in 2012. The practical takeaway is that a more accommodative stance may add to downward pressure on the US dollar.

Current expectations imply around two rate cuts through 2026, with the potential for further easing beyond that, broadly consistent with the median projections shown in the chart below. These are forecasts rather than guarantees, and they can shift as economic data and policy guidance evolve.