Forex Market Outlook: Currencies and Gold React to Fed, ECB and BoJ Signals

Following the latest European Central Bank (ECB) meeting, most macroeconomic forecasts were revised upward. The regulator now expects GDP growth of 1.4% this year, slowing to 1.2% in 2026 before returning to 1.4% in 2027. Inflation is projected at 2.1%, 1.9%, and 1.8% respectively, while core inflation excluding energy and food prices is expected at 2.4% this year and 2.2% next year. Nevertheless, intensifying global competition and increasingly restrictive and protectionist policies—particularly in the United States—could weigh on the outlook. European manufacturers continue to face higher energy costs following the reduction of imports from Russia.

Meanwhile, the US dollar has come under pressure after the release of inflation data, which undermines the Federal Reserve’s key argument for keeping monetary policy unchanged. In November, headline CPI slowed year-on-year from 3.0% to 2.7%, below the forecast of 3.1%, while core CPI eased from 3.0% to 2.6%. Investors also monitored US jobless claims data: initial claims for the week ending December 12 fell from 237,000 to 224,000 versus expectations of 225,000, while continuing claims rose from 1.830 million to 1.897 million, compared with forecasts of 1.940 million.

GBP/USD

The British pound is trading with near-flat dynamics against the US dollar, hovering around 1.3376, as investors assess UK retail sales data for November. On a year-on-year basis, sales held at 0.6% (with the previous reading revised up from 0.2%) versus expectations of 0.9%. On a monthly basis, sales improved from –0.9% (revised from –1.1%) to –0.1%, against forecasts of a 0.4% increase. Stronger consumer spending could support GDP growth and may encourage the Bank of England to slow the pace of monetary easing.

At its December meeting, the Bank of England cut the interest rate by 25 basis points to 3.75%. Five members of the Monetary Policy Committee voted in favor of the cut, while four preferred to keep rates unchanged. Governor Andrew Bailey was the only member to change his position from November, opening the door for a continuation of the dovish cycle. Inflation, however, remains well above the 2.0% target despite its downward trend, with headline CPI slowing to 3.2% in November. Policymakers expect disinflation to accelerate, partly supported by the newly adopted fiscal budget, which includes tax increases alongside reductions in social spending.

The US dollar also remains under pressure following last week’s Federal Reserve meeting, where the regulator lowered borrowing costs by 25 basis points to 3.75% as expected and maintained its guidance on future easing. At the same time, officials revised GDP growth expectations higher due to improving global prospects and continue to project a gradual decline in inflation over the coming years, reinforcing expectations of a more accommodative policy stance.

An additional factor for the dollar is the upcoming change in the Fed chair in 2026. One of the leading candidates is Kevin Hassett, the current White House economic adviser and a supporter of President Donald Trump’s policies. Later today at 17:00 (GMT+2), updated inflation expectations from the University of Michigan will be released and are expected to remain unchanged at 4.1% for one-year expectations and 3.2% for five-year expectations.

AUD/USD

The Australian dollar is losing ground against the US dollar, reversing part of the previous day’s corrective move. The pair is testing the 0.6600 level to the downside as investors assess private sector credit data for November. On a yearly basis, credit growth accelerated from 7.3% to 7.4%, while the monthly reading slowed from 0.7% to 0.6%, exceeding expectations of 0.2%.

Markets continue to analyze the delayed US labor market report for November, which was released nearly two weeks late due to the shutdown, while the Federal Reserve made its rate decision without a complete set of data. In October, nonfarm payrolls fell by 105,000 after a gain of 108,000 in the previous month, while November payrolls increased by 64,000 versus forecasts of 50,000. Average hourly earnings slowed from 0.4% to 0.1% month-on-month and from 3.7% to 3.5% year-on-year, pointing to easing inflation pressures. Unemployment also jumped from 4.4% to 4.6%, signaling cooling labor market conditions.

In Australia, recent data showed mixed business activity trends. The S&P Global manufacturing PMI rose from 51.6 to 52.2 in December, while the services PMI declined from 52.8 to 51.0. Investors also noted a sharp drop in the Westpac consumer confidence index in December from 12.8% to –9.0%. Slowing economic activity continues to pressure the Reserve Bank of Australia (RBA) regarding future monetary easing. At its December 9 meeting, the RBA unanimously voted to keep interest rates unchanged.

USD/JPY

The US dollar is showing moderate gains against the Japanese yen, once again testing resistance near 156.10. Market attention remains focused on the Bank of Japan’s latest policy decision, which has so far failed to provide strong support for the yen. As expected, the BoJ raised its interest rate by 25 basis points to 0.75%, the highest level since September 1995, citing persistently elevated inflation well above the 2.0% target.

The decision was unanimous, despite market doubts over further tightening due to the stance of Prime Minister Sanae Takaichi, who has advocated for lower borrowing costs. Recent inflation data met expectations, with the national CPI excluding food and energy easing from 3.1% to 3.0% year-on-year, while the broader index slowed from 3.0% to 2.9%.

Later today, updated inflation expectations from the University of Michigan are expected to remain unchanged at 4.1% for one-year and 3.2% for five-year horizons. Meanwhile, US inflation data have strengthened expectations for further Fed easing in 2026, even as officials currently project only one additional 25-basis-point rate cut.

XAU/USD

The XAU/USD pair is consolidating near local highs last seen on October 20, trading around 4325.57. Market activity remains subdued as traders gradually prepare for the Christmas holidays, closing medium- and long-term positions. At the same time, the US dollar remains under pressure amid expectations of faster monetary easing by the Federal Reserve.

Recent inflation data reinforced these expectations, with November CPI slowing year-on-year from 3.0% to 2.7%, while core inflation eased from 3.0% to 2.6%. The Fed is highly likely to keep interest rates unchanged at 3.75% at its January meeting, although it may adopt a more dovish tone.

In addition, the upcoming change in Fed leadership in 2026 could influence the future direction of US monetary policy. Investors continue to digest delayed US labor market data, with October nonfarm payrolls falling by 105,000 and November adding 64,000 jobs, alongside easing wage growth and rising unemployment, all pointing to cooling economic momentum.