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.

The biggest move in 80 years We need to start with what is probably the biggest structural change Europe has seen since the formation of the European Union to its biggest member – Germany. For the first time in 80 years Germany’s Bundestag has voted to lift the country's “debt brake” to allow the expansion of major defence and infrastructure spending under new leadership of incoming Chancellor Frederick Merz. We need to illustrate how much spending Germany is going to do in defence it is up to €1 trillion over the forward estimates. 5 billion of which is to support Ukraine for this year and to continue to put European pressure on Russia.

It's also a country it has been highly sceptical of stimulating itself having suffered through the Weimar government of the 1920s and 30s that led to hideous hyperinflation and drove the country to political extremism. It is also clearly in response to Washington’s change of tact regarding Europe and the war in Ukraine. As it is now clear that Europe who need to defend itself and that NATO is becoming a dead weight that can no longer be relied upon.

Couple this with what the EU is doing itself. Last week we saw the head of the EU Ursula von der Leyen, delivered a speech that stated the continent needed to: “rearm and develop the capabilities to have credible deterrence.” This came off the back of the EU endorsing a commission plan aimed at mobilising up to €800 billion in investments specifically around infrastructure and in turn defence. The plan also proposes to ease the blocs fiscal rules to allow states to spend much more on defence.

If you want to see direct market reactions to this change in the continent’s commitments – look no further than the performance of the CAC40 and DAX30. Both are outperforming in 2025 and considering how far back they are coming compared to their US counterparts over the past 5 years – the switch trade may only be just beginning. What is also interesting it’s the limited reactions in debt markets.

The 10-year Bund finished marginally higher, though overall European bond markets saw limited movement. Bonds rallied slightly following confirmation of the German stimulus package. Inflation swap rates were little changed, while EUR swaps dipped, particularly in the belly of the curve.

EUR/USD ticked up 0.2% to $1.0960. Hopes for a potential Russia-Ukraine cease-fire also offered some support to the euro but has eased to start the weeks as Russia looks to break the deal before it even begins. Staying with currency impactors – The US saw a range of second-tier U.S. economic data releases last week all came in stronger than expected.

Housing starts jumped, likely benefiting from improved February weather. Industrial production rose 0.7% month-over-month big beat considering consensus was for a 0.2% gain while manufacturing jumped 0.9%. Import and export prices also exceeded forecasts, prompting a slight upward revision to core PCE inflation estimates, mainly due to higher-than-expected foreign airfares.

These upside surprises led to a brief sell-off in treasury bills but yields soon drifted lower as equities struggled. Looking ahead to the FOMC decision, expectations remain for the Fed to hold steady. Chair Powell has emphasised that the U.S. economy is in a "good place" despite ongoing uncertainties and has signalled there’s no rush to cut rates.

The Fed’s updated projections are expected to show a slight downward revision to growth, a more cautious view on GDP risks, and slightly higher inflation forecasts. As for rate cuts, the median expectation remains two 25bps cuts in 2025 and another two in 2026, with markets currently pricing around 56bps of easing next year. All this saw the U.S. dollar trade mixed against G10 currencies as local factors took centre stage.

Despite a weaker risk tone in equities, the DXY USD Index edged down 0.1%. The Aussie and Kiwi dollars softened (AUD/USD -0.3%, NZD/USD -0.4%) as risk sentiment deteriorated. The AUD will be interesting this week as we look to the budget that was never meant to happen on Tuesday.

Considering that we are within 10 weeks of a certain election, the budget really is not worth the paper its written on as it will likely change with an ‘election’ likely to be enacted straight after the new government is sworn in. That said, the budget is likely to show once again that Canberra is messing at the edges and not taking the steps needed to address structural issues. The AUD is likely to fluctuate on the release and then find a direction (more likely to the downside) over the week as the budget shows the soft set of numbers with little or no change in the interim.

Finally, the rally of the yen appears to be over as it continues to weaken. USD/JPY climbed from Y149.20 in early Tokyo trade to around Y149.90 as the London session got underway. With CFTC data showing significant long yen positioning, some traders likely unwound short USD/JPY bets ahead of the BoJ decision.

Other JPY pairs moved in tandem with USD/JPY. But whatever is at play out of Japan – the rally of the past 6-7 months looks to be ending and with USD/JPY facing the magic Y150 mark – will the BoJ step in like it did last year? Will the market look straight past it again?

Or will we see a completely different trend?