Remember the spring optimism for a neat, predictable easing cycle across the world’s rich economies? That story is fraying. After a year in which markets penciled in a sequence of modest rate cuts, the last policy meetings of 2025 are revealing a very different picture: central banks are stepping back, data is complicating the script, and the easy narrative of falling rates is losing momentum.
The mood: caution over conviction
The Federal Reserve’s quarter‑point cut earlier this month — and the guarded tone that came with it — captured the shift. Fed officials signalled fewer cuts ahead than markets had hoped, even as the central bank launched monthly T‑bill purchases under “reserve management purchases” (initially about $40bn per month). Chair Jerome Powell’s post‑meeting comments leaned dovish on the labour market, but not decisively dovish enough to lock in a long easing run.
Across the Atlantic, the European Central Bank looks content to sit pat. Rising growth forecasts for the euro area have emboldened the hawkish camp and make further cuts less likely in the short term. The Bank of England, by contrast, finds itself close to the opposite corner: weak UK GDP and slipping wages have put a 25‑basis‑point reduction squarely on the table — a decision that could come down to a razor‑thin vote within the Monetary Policy Committee.
And in Tokyo the script flips again. The Bank of Japan is widely expected to resume normalisation with a rate rise, a move that would underline how divergent policy paths have become even among advanced economies.
A data calendar that matters
Traders have a stacked week to parse. The US arrives with delayed October and November payrolls and a November consumer‑price print — numbers that will influence Fed pricing into 2026. Consensus is modest: consensus forecasts have hovered around subdued job gains and a CPI that may edge up slightly year‑over‑year due to tariff and insurance effects, but the headline story is one of weakening labour momentum.
In the UK, a jobs report earlier in the week and November CPI just before the BoE meeting will shape whether Governor Andrew Bailey can rally a majority for a cut. The Bank of Japan’s Tankan survey and the BoJ meeting itself will dominate Asian attention; in Europe, ECB projections and Q4 growth data are likely to reinforce the ‘policy is in a good place’ message from Frankfurt.
For those tracking markets: retail sales, housing figures and weekly initial claims in the US, plus a flurry of regional Fed manufacturing surveys, make this a data‑heavy stretch that could create sharp intra‑week swings.
Markets and FX: the dollar’s wobble and the yen’s dilemma
The US dollar has already shown signs of fatigue. After the Fed’s cut and the start of balance‑sheet purchases, broad‑based dollar selling gained traction. Money markets and some strategists see downside risk for the dollar into year‑end if labour data confirms the slower jobs story.
The yen, however, has been an outlier. Despite elevated odds of a BoJ hike, the yen hasn’t rallied — a symptom of market concern that a single hike won’t be enough to erase fears that Japan is behind the global tightening curve. That dynamic has pushed up long‑dated JGB yields (the 30‑year has been particularly volatile), and has fed chatter about whether intervention might be needed should USD/JPY spike higher.
The euro has benefited from both a softer dollar and a hawkish repricing of ECB expectations. Narrowing yield differentials and stronger euro‑area activity have supported the euro — some banks now forecast EUR/USD moving back above 1.20 in 2026 — while sterling faces pressure if the BoE begins a modest easing sequence.
The political and technical wrinkles
A few factors make simple forecasting hazardous. Irish statistics continue to skew euro‑area growth figures thanks to large multinational flows, masking weaker underlying activity in parts of the bloc. At the Fed, the famous “dots” in the Summary of Economic Projections show a broad spread of views, and some of the dots likely reflect alternate presidents rather than the current voting cohort — a technicality that complicates interpretation but matters for market psychology.
Central banks also carry different domestic constraints. The BoE’s committee is narrowly divided and a decision may hang on the governor’s calculus; the BoJ must balance a nascent recovery against years of ultra‑easy policy; and the ECB is sensitive to exchange‑rate moves that could feed disinflation.
Market posture: where the risks sit
If US payrolls print weaker than consensus and UK labour data adds to the slowdown narrative, pressure will grow for more Fed and BoE easing — supporting risk assets and further dollar softness. Conversely, stronger‑than‑expected euro‑area activity or signs that services inflation is persistent in Europe could keep the ECB on hold and bolster the euro.
In currency and bond markets, the key flashpoints are USD/JPY (and the risk of intervention), the shape of the JGB curve, and whether yield spreads between the US and euro area narrow further. Equity markets are watching liquidity signals too: increased Fed balance‑sheet purchases are a new variable for risk‑asset flows.
This is one of those weeks when a few datapoints or a single sentence in a press conference can tilt probabilities. Central bankers are still trying to read the economic tea leaves; markets are trying to price what they see. Expect volatility, and bring your patience.