We see the USD backing up in Q4 till employment data decidedly turns worse. We also expect a more hawkish Fed to current market expectations. Though we ourselves believe employment data should turn out weak and Fed should continue cutting, recent Fed speak looks heavily stacked against a Dec cut in absence of US macro data. With terminal rate pricing for US moving to 3.10-3.15 band, DXY should strengthen soon in short term. Major losers could be EUR & GBP. We also like the fact that USD has historically tended to rebound with the end of government shutdowns, albeit with a short lag, perhaps as the resumption of public spending and back pay supports economic activity. But we also concede that the path toward USD strength could be non-linear as the market swings from excessive concerns about labour-market cooling to exuberance over strong US economic momentum. If by 10th Dec, Fed is able to get the Oct & Nov NFP data which we believe might be weak, Fed will be forced to go for a cut but Fed chair Powell will ensure it ends up as a hawkish cut. We also expect Q3 US GDP data to be strong; the Atlanta Fed nowcast points to 4% growth on a seasonally adjusted annual rate (saar) basis. There could be downside risks to the USD from the Supreme Court hearings on the legality of US tariffs though dropping the tariffs would essentially eliminate what many view as a sales tax on imported goods, so it could end up being somewhat stimulatory. On EUR, we see Q4CY25 ending at 1.15. We have found no evidence of sustained buying by reserve managers to explain the EUR’s recent outperformance; this is also in line with the IMF’s findings. On GBP, we see Q4CY25 ending at 1.3. The UK economic backdrop remains poor, evidenced by a loosening labour market, easing wage growth and sluggish economic momentum in Q3. Recent policy confusion on tax hikes further adds to GBP underperformance against DXY. On JPY we see Q4CY25 ending at 155+. Market continues to test the Ministry of Finance (MoF)’s tolerance for JPY weakness, with BoJ rate hikes perceived to be on the back burner. Our base case remains that the Bank of Japan will hike rates in December, but we see a growing risk that it defers policy tightening to 2026. Prime Minister Takaichi recently staffed the Council on Economic and Fiscal Policy with policy makers who favour reflationary fiscal and monetary policy, and reiterated that Japan has not exited deflation yet, further underscoring her implicit opposition to BoJ tightening. On AUD, we are positive & expect Q4CY25 to end at .66. The market has added to AUD longs via AUD-NZD (which briefly breached the 1.16 level). With Australia’s economic recovery underway, consumer confidence rose in November to the highest since level end 2021. In addition commodities strength & CNH appreciation tendency support AUD.
