Focus on FOMC turns to the BoJ and BoE in final full week of trading
The desk anticipates increased volatility in the FX markets as the focus shifts from the recent FOMC meeting to upcoming decisions from the BoJ and BoE. Per the full note from MUFG EMEA, the final meeting of the year for the FOMC has set the stage for the US dollar's trajectory, particularly as traders reassess their positions ahead of key central bank announcements. The potential for a rate hike from the BoJ could restore confidence in the JGB market, which has implications for USD/JPY dynamics. With no major calendar events in the next 30 days, market participants will be closely monitoring these central bank meetings for directional cues.
What the desk is arguing
The desk posits that the FX market is on the brink of another pivotal moment as the focus shifts from the recent FOMC meeting to the BoE and BoJ. With the US dollar potentially facing volatility after the Fed's latest moves, the expectations surrounding the BoE's and BoJ's monetary policy decisions could further influence trading dynamics.
The looming meetings of the BoE and BoJ are generating speculation about possible rate hikes, particularly from the BoJ, which may seek to bolster confidence in the Japanese Government Bonds (JGB) market. Such actions, if actualized, might create a stronger yen, while the pound's fate hinges on the BoE's communication around its own rate trajectory.
Where it sits in our coverage
In line with our consensus target of 1.075 for EUR/USD, our position aligns narrowly with expectations of modest dollar strength in the wake of central bank decisions. The projected range spans from 1.04 to 1.12, capturing potential scenarios based on multiple economic outcomes.
Several banks provide insights relevant to this outlook. Notably, firms have varying targets reflecting their unique analyses:
While our coverage aligns with the cautious optimism on the dollar's performance, some firms express differing views. For instance, BofA has set a lower target, anticipating weaker dollar momentum owing to global uncertainties and Fed's potential dovish tilt proceeding the rate hike cycle.
01The focus on USD volatility shifts toward upcoming BoE and BoJ decisions.
02The BoJ's potential rate hike could restore confidence in JGBs and uplift the yen.
03The broader implications for the FX market hinge on the interplay between central bank policies.
Market implications
Current FX positions are likely to react sensitively to the outcomes of the BoE and BoJ meetings, with the potential for increased volatility across major pairs as market participants adjust to new monetary policy signals.
Risks to this view
Key risks include unexpected policy decisions from either central bank that deviate from market expectations, geopolitical developments that may affect economic outlooks, and broader market reactions following the FOMC's guidance.
Welcome to the MUFG Global Markets FX Week Ahead podcast with Derek Halperny, Head of Research, Global Markets, EMEA and International Securities. It's Friday 12th December 2025 and joining Derek to pose some questions on the financial market themes for the week ahead is Chris Jakubowski, Head of Hedge Fund FX Sales. The following podcast is intended for professional investors and eligible counterparties only, and not for retail clients.
Any content should not be regarded as an offer to conduct investment business or an investment recommendation, but for information purposes only. Hi Derek, how are you? I'm good Chris, and yourself?
Yeah, I'm very good, thanks. Getting those festivities. Indeed, yeah, one more week and we're into Christmas.
We are, Christmas jumpers on. Right, let's kick things off. And I thought first thing to do would just be to, if we can just have a little chat, get your thoughts on the Fed, particularly because we're looking at the week ahead.
And I thought there was some of this chat there about a weaker labour market and obviously next week we'll have the NFP, which brings two months data. So yeah, quickly, just what are your thoughts on the Fed and what you think is going to come with the NFP? Yeah, on the Fed, you know, listening to Powell in the press conference, he was asked a question by a journalist, so why did you cut today?
And that's the moment he turned dubbish. And once he got onto the labour market, and as I said, the town was more dubbish, the markets then started to respond. The surprise element, I guess, was the reserve management purchases that had been murmured as something that was likely, but probably in Q1, ahead of the April liquidity issue around tax payments for US households.
So it's come earlier, obviously, to cover year end concerns. And we're going to have about 40 billion per month of T-bill purchases, but could potentially buy out to three year. So it's not QE, it's more technical, but it has the same results, which is more liquidity.
And I think that element certainly helped to encourage some dollar selling. And then as I said, once Powell got onto the labour market, and there was that kind of, you know, clear dubbishness in terms of the jobs market, I think, then we really started to see the response more clearly. In particular of note, again, you mentioned NFP, you know, Powell explicitly gave an estimate of about 60,000 in terms of the over report of payrolls.
And the six month running average at the moment is 59,000. So, you know, basically, we're talking about no jobs in the last six months. Yeah, yeah, slight, slight contraction.
So, again, labour market conditions are pretty weak. And I've said it before, it's very unusual just for the market to suddenly recover on its own. And I think the dangers are certainly there that we see further weakness over the coming months.
So yeah, next week is really important in that context. I think the other interesting element, which I felt was a bit overplayed in commentary, was this kind of comments about the silent descents. So you saw the dots in terms of the estimate for the end of 2025.
And there were six dots showing a Fed funds rate, not showing the cut that we got. Now, we had two descents. So we know those are two of those dots.
So there was effectively these other four, so called silent descents. But we don't know who those presidents are. And they could very well be the 2026 alternate voters.
And even the 2027 voters. So Beth Hammack comes in in January, Neil Kashkari again in January, along with Laurie Logan and Anna Paulson. So Hammack and Kashkari could very well be two of those dots.
But then the following year, so the 2027, we've got Barkin, Bostitch, Daley and then Goolsby again. Bostitch is retiring, but one of his would have been the dot. So Barkin and Bostitch could have been the other two.
So in terms of it raising the bar for cuts next year, I don't really think that's correct. Because ultimately, you've got two hawks leaving this year, the two that dissented. And you've got two coming in next year in terms of Hammack and maybe Kashkari.
And, you know, we're kind of maybe net-net still the same. So I don't see the silent descent, so to speak, as being much of an issue. And really, if you consider 12 of the 19 dots showed one or more cuts in 2026.
Eight of the 19 showed two or more cuts. So, you know, the bias is still towards more cuts. And again, going back to the jobs data, if it's weak enough, I think they can certainly do more.
So there's only 15 basis points priced for March. I think we're underpriced. If the data next week was really bad, there's only six basis points priced for January.
If the data is really bad, the market's going to start reconsidering January. And that's the driver of your weaker dollar? It is over the short term and over the year as a whole.
I think, you know, there's 50 basis points priced for next year. So the dots show one cut, the market says two, we say three. And, you know, ultimately, I think the jobs data can confirm that.
So, you know, there's no getting away from it. Next week is important over the short term. But negative momentum is back.
Dollar is selling. We know about the dollar bias into the end of the year. It tends to perform poorly.
Euro is the second best G10 performing currency in December. And it all points to the potential, certainly if the labour market is weak, data is weak next week. 118, 119 is very achievable by the end of the month, even 120. OK, talking then on other central banks, let's let's move on.
Let's leave the ECB, really, because that's pretty much a done deal. Yeah. And in the interest of time, let's look at the BOJ, though.
I think obviously that's an interest for us. And although that's pretty much a done deal as well in 25 basis points being priced in. But what are your thoughts around there and what are you looking for?
Yeah, like I must say, I think we're in the danger zone or, you know, we're not far off in terms of a potential problem here. And I just think, you know, for months, there's been kind of murmurings of the BOJ being behind the curve. And we've had this uber caution from the BOJ.
And now we've had... Because of the real rates being still low, still very low? Yeah, negative real rates and inflation still at around 3 percent, dollar yen back towards the highs.
And what I found interesting is on the 1st of December, we had Governor Ueda's speech pretty much signaling they were going to hike in a roundabout way. And the markets responded in terms of the rates market. But dollar yen today compared to that day of the speech is pretty much unchanged.
So there's been a full pricing of nearly a full pricing of the hike next week. But dollar yen hasn't done very much at all. And of course, the Fed have cut and there's been a broad based sell off.
So you add all of that up, and you have, I think, a market that is concerned about the BOJ being behind the curve. And my conclusion has to be that just merely hiking 25 basis points might not do it for helping to lift the yen. We need more than that from Ueda next week.
We need him to give a pretty clear, strong message that there's more to be done. There is this kind of clamour for more about the neutral race. The BOJ in the past have hinted that in nominal terms, it's between one and two and a half percent.
So the R star is between minus one percent... In real terms, the R star is minus 0.5 percent, or sorry, minus 1% plus 0.5%. So you need to get up to one and a half-ish to be in that zone.
And we think they're going to raise rates twice next year. So that gets you to one and a quarter, assuming the hike next week. And then if you look at the terminal rate in terms of the two-year, the three-year OAS rate, it's about one and a half.
So that would be another 25 on top. So maybe in 2027. So there's more to be done.
But I think we need to get some kind of gauge that the BOJ believes that as well. Why does it need to be 2027? Is it just because of their conservative nature that would stop them hiking?
It's not like they've got huge amounts to hike, is it? No, I guess they need to go back to a faster pace. I guess two next year would be the same as this year if they hike next week, which I think they will, obviously.
But I think getting to the neutral rate when you've been in negative territory for so long, where you've had deflation for the guts of two decades, yeah, I think they're being cautious. But again, I think the JGB market should give them direction. And the steepness of the two's 30s, well, it's about 230 basis points, much steeper than the other G4 country curves on two's 30s.
It does tell you that the risks are there. And we all know that foreign investors have been the primary source of demand for super long JGBs. If they turn away from the market and you don't get domestic buying coming in, which I don't think you would if there's concerns about the BOJ being behind the curve.
And then you have a recipe for a much bigger sell off in JGBs, a spike in volatility and yen selling. And then you get into the messy scenario of having to intervene when there is a confidence crisis in terms of the BOJ's policy stance. So I just feel we're in a dangerous moment and they need to take good action next week in terms of being clear that they're independent and that they're determined to bring inflation down to the 2% level.
So, you know, they've got a big task. My feeling is next week's meeting is more important than, I don't know, any of the meetings we've had. More important than the FX or bond markets?
Both, because I think they're linked. Certainly, if you look at the two's 30s that I've just spoken about, if you chart that with dollar yen, very closely aligned. So, you know, the sell off in the JGB market and that kind of concern is definitely feeding into the yen remaining at these weak levels.
Cool. OK, let's quickly move on to the Bank of England then, Home Soil. They're looking to cut 25 basis points.
Looks set to be some dissenters there as well. What are your thoughts on the BOE and sterling as a currency itself? Yeah, like we've had weak data today.
So, GDP contracted 0.1%. That's the third contraption in the last four months. So, when they signaled earlier this year that they wanted to slow the pace of easing because they were concerned about inflation not coming down, the economy has kind of changed since then and much weaker.
So, I think there's definitely justification. Then you add in the fact that the last two wage reports, employment reports and inflation were on the weak side. It's very compelling that they have the case to cut.
The obvious one is Bailey. So, the no change vote in November was 5-4. So, Bailey flips.
So, he votes with the November dissenters for a cut in December. That gets you to 5-4. Hugh Pill is possibly one who could join, given the data.
So, I think you could possibly get a 6-3 vote. But you still have, I think, some determined hawks, Katharine Mann, Megan Green. So, you'll still have a split, but 6-3 could be what we get.
What's Cable do on 6-3 then? Well, again, it's the statement and the guidance. I think on unchanged guidance, probably not a lot, but I would have a bias towards the downside.
Our view is, as it has been actually for quite some time, and that is that the dollar weakens, so Cable can go up, but that Sterling underperforms within the G10 space. Now, to be honest, that was playing out. Euro-Sterling broke above 88.
We've then corrected back again. There has been some, certainly from a markets perspective in terms of the gilt market, the budget has been taken reasonably well by the markets, a lot less so politically. I think that's where the damage has been done.
And that does bring about the risk we think of a leadership challenge for Keir Starmer in 2026. So, that kind of political risk premium could slowly build. But if the markets don't throw their toys out the pram and the gilt market stays well supported, and so they can't really go on government stability grounds, and it would have to be party politics that would drive that.
And do you think they would do that? It seems like political suicide to the party, given that they sort of are meant to be one of the manifesting things of stability and not being like what the Tories did. Do you think they'd do that?
Well, I think if the polls continue as they are, with Keir Starmer's support declining and Nigel Farage's going up or staying much higher than Keir Starmer's, yeah, I think they will. They're thinking about 2029, not next year. They don't have to have an election.
So, they have the time to make the change. They have plenty of time. But they have also time to win back support, don't they?
Yeah. I think where the gilt markets and sterling could suffer is obviously perceptions of a leadership challenge would be that the party shifts to the left. And then obviously, that brings back concerns about fiscal policy going forward.
And I think in that context, that could bring some premium certainly into the markets. And in that sense, I think it's a risk for next year. It's not around the corner.
But yeah, look, we're fully prized for next week. I don't think that's going to result in any great moves. Yeah.
Okay. Thanks very much, Derek. Have a great weekend.
And we'll catch up again soon. Indeed. Thanks, Chris.
Have a good weekend yourself. All right. Cheers.
Bye bye. Come back next week for more insights from the Global Markets Research Team.