US
USD is mixed and still trading just under its 200-day moving average. 10-year Treasury yields testing the top-end of its 3.95%-4.20% range in place since September, and US equity futures are treading water.
The FOMC is expected to trim the target range for the Fed funds rate by 25bps to 3.50-3.75% (90% priced in). The press release is likely to stress again that inflation “remains somewhat elevated,” and “downside risks to employment rose in recent months.”
The Fed could announce plans to start buying short-term T-bills given recent upward pressure on funding rates. This would be a liquidity management measure, not a change in the underlying stance of monetary policy. Instead, the FOMC vote split, Summary of Economic Projections (SEP) and Fed Chair Jay Powell’s press conference will steer the hawk-dove policy tilt.
Markets are positioned for a hawkish cut as US two-year swap rates (3.20%) are slightly above the FOMC 2027/2028 funds rate projection (3.13%). That means the bar for a dovish surprise is low.
The FOMC vote will show more dissenters than at the October 28-29 meeting. At that meeting, Fed Governor Stephen Miran voted for a 50bps cut and Kansas City Fed president Jeff Schmid supported keeping rates on hold. Based on recent remarks, we expect them to vote the same way this time, with at least one other participant (St. Louis Fed President Alberto Musalem) siding with Schmid. The risk is there’s more than two dissenters favoring a hold, potentially Governor Michael Barr, Boston Fed president Susan Collins, and Chicago Fed president Austan Goolsbee.
FOMC Dot Plots should remain unchanged. In September, the FOMC median rate forecast implied one cut for both 2026 and 2027, no change in 2028 and the longer-run at 3.0%. Risk is the FOMC front-loads rate cuts to 3.0% in 2026 to prevent the hiring slump from morphing into widespread firing. That can modestly weigh on USD as one-year interest rate futures anchor closer to 3% from currently 3.15%.
Ahead of the Fed decision, the US Q3 employment cost index (ECI) takes the spotlight (1:30pm London, 8:30am New York). The ECI is the Fed’s favorite wage data because it’s more comprehensive and controls for changes in the composition of employment. ECI is expected to rise 0.9% q/q vs 0.9% in Q2. ECI wages & salaries was 3.6% y/y in Q2 and consistent with the Fed’s 2% inflation stability goal given that productivity growth is around 2%.
CANADA
USD/CAD is firmer above key support at 1.3800. Today’s Fed outcome will dictate whether USD/CAD clears that support stalls above it. The Bank of Canada (BOC) is widely expected to keep rates on hold at 2.25% (2:45pm London, 9:45am New York). The BOC will likely emphasize again that it “sees the current policy rate at about the right level to keep inflation close to 2%.”
No Monetary Policy Report or press conference will accompany this meeting. The swaps market implies a full 25bps rate increase to 2.50% over the next twelve months, which bodes well for CAD.
NORWAY
NOK ignored Norway’s mixed November CPI print. Headline inflation slowed less than expected to 3.0% y/y (consensus: 2.7%, Norges Bank forecast: 2.5%) vs. 3.1% in October but underlying inflation was cooler at 3.0% y/y (consensus & Norges Bank forecast: 3.1%) vs. 3.4% in October.
Nevertheless, persistently above target inflation backs the Norges Bank’s prudent easing of monetary policy stance and is NOK supportive. The Norges Bank has penciled in one 25bps cut in the next 12 months to 3.75% which is roughly in line with interest rate futures.
CHINA
China’s November CPI matched consensus. Headline inflation quickened to 0.7% y/y (the highest since February 2024) vs. 0.2% in October driven by a rise in food prices while core CPI remained at 1.2% y/y for a second straight month. PPI printed at -2.2% y/y (consensus: -2.0%) vs. -2.1% in October and still suggests that deflationary pressure remains high.
China’s benign inflation backdrop continues to suggest that consumption spending is too weak. In our view, a continued appreciation in China’s currency could help the country shift its growth model towards consumer spending by boosting disposable income through cheaper imports. Bottom line: USD/CNH downtrend is intact.
BRAZIL
Brazil’s central bank (BCB) is widely expected to keep rates at 15.00% for a fourth consecutive meeting (9:30pm London, 4:30pm New York). The risk is that it’s a dovish hold. Brazil headline inflation is making good progress towards the bank’s 1.5%-4.5% target band and 2025 projection of 4.6%. The swaps market price in 250bps of cuts in the next six months.
Politics continue to weigh on BRL. Flávio Bolsonaro’s (son of the jailed former president Jair Bolsonaro) announced last week that he’ll run for president in 2026 - general elections will be held on October 4. That raised the possibility of fracturing the right, bolstering left-leaning President Luiz Inácio Lula da Silva’s re-election prospects. Regardless, Brazil’s high real positive interest rates (currently around 10%) act as a magnet for foreign capital in favor of a firmer BRL.
