US
USD is steady near yesterday’s high, with the dollar index (DXY) trading just 0.3% below its 200-day moving average. Today’s December ADP employment (1:15pm London, 8:15am New York) and November JOLTS report (3:00pm London,10:00am New York) are policy relevant. Consensus expects ADP private payrolls at +50k vs. -32k in November. Still, that’s unlikely to ease concerns about weakening labor demand. An average of -13k jobs was lost in September, October, and November.
Meanwhile, further declines in the JOLTS hiring and quit rates would add to signs of worsening labor demand. If so, it would validate the 50bps of cuts priced into Fed funds futures over 2026 and weigh on USD.
The December ISM services index is expected to remain indicative of solid services sector activity (3:00pm London, 10:00am New York). The headline index is projected at 52.2 vs. 52.6 in November. However, a further decline in the prices paid sub-index would support the case for additional Fed funds rate cuts.
EUROZONE
EUR/USD is trading on the defensive below 1.1700. The Eurozone preliminary December CPI supports the ECB’s on hold bias. In line with consensus, headline inflation dipped 0.1pts to 2.0% y/y, hitting the ECB’s medium-term target. Both core and services inflation also fell 0.1pts to 2.3% y/y (consensus: 2.4%) and 3.4% y/y, respectively.
Bottom line: the ECB is in a good place to keep rates on hold at 2.00% for some time. That suggests EUR/USD will hold above 1.1500 over the next few months. The swaps curve price-in steady rates in the next twelve months and a 25bps rate increase to 2.25% in the next two years.
AUSTRALIA
AUD leads G10 currencies in the new year, with AUD/USD eyeing next resistance at 0.6800. Australia inflation eased in November but remains above the RBA’s 2-3% target range. Headline CPI was 3.4% y/y (consensus: 3.6%) vs. 3.8% in October and the policy-relevant trimmed mean CPI matched consensus at 3.2% y/y vs. 3.3% in October. Headline and trimmed mean inflation are tracking the RBA’s December projection of 3.3% and 3.2%, respectively.
At its last December meeting, the RBA stressed it’s done easing, warning “the risks to inflation have tilted to the upside.” RBA cash rate futures imply nearly 50bps of hikes to 4.10% in 2026 which bodes well for AUD. For now, this seems reasonable given modest excess demand in the economy. The NAB measure of capacity utilization has improved above its long-term moving average, suggesting businesses are using more of their available productive capacity to meet demand.
JAPAN
USD/JPY is holding under last year’s double-top around 158.90. China escalated its diplomatic feud with Japan, but JPY implications are neutral. Yesterday, China imposed controls on exports to Japan with any military use. According to Bloomberg, China’s dual-use export control list features more than 800 items, ranging from chemicals, electronics and sensors to equipment and technologies used in shipping and aerospace.
China justified the measure by citing last year’s remarks by Japanese Prime Minister Sanae Takaichi on Taiwan, hinting at the possibility of military intervention in the Taiwan Strait.
Finding an exit from these tensions will be difficult because the crisis sets Japan’s security goals against China’s enduring drive to reclaim Taiwan. Instead, we sympathize with the view that Japan and China are entering a “managed rivalry” rather than a complete rupture. Too much mutual prosperity depends on continued trade while diplomatic channels in both capitals provide crisis management tools.
