The US dollar maintained its strength against major global currencies on Thursday, December 18, as financial markets worldwide held their breath for a series of crucial interest rate decisions from leading central banks. The spotlight is firmly on the Bank of England, the European Central Bank, and the Bank of Japan, whose policy moves are set to define the near-term trajectory for currency and bond markets.
Sterling Weakens on Inflation Surprise, BOE in Focus
The British pound remained under pressure following an unexpected and significant drop in UK inflation data. This surprise weakness has strongly reinforced market expectations that the Bank of England (BOE) will implement a quarter-point interest rate cut later today. Analysts now see a near 100% probability of this move, a dramatic shift fueled by the softer November consumer price figures.
Ray Attrill, head of FX strategy at National Australia Bank, stated that the weak inflation reading "has sealed the deal for a BOE rate cut." Consequently, the sterling was steady at $1.3367 after declining 0.4% in the previous session. The dollar index, which tracks the greenback against a basket of peers including the euro and yen, was little changed at 98.39.
BOJ Set for Historic Hike, Yen Trims Losses
Across the globe in Asia, the Bank of Japan (BOJ) began a two-day policy meeting that is widely anticipated to result in a hike in short-term policy rates to 0.75%. This would mark the highest level in three decades, a response to persistent inflation driven by high food costs that remain above the central bank's 2% target.
The Japanese yen, which had slid 0.6% on Wednesday, pared some of those losses, trading at 155.87 per dollar. Vincent Chung, a fixed-income portfolio manager at T Rowe Price in Hong Kong, suggested the BOJ may need to raise rates twice in 2026 to tackle persistently negative real interest rates. He noted that while the yen might see temporary weakness if the BOJ's forward guidance is not sufficiently hawkish, the broader trend could be supportive.
Domestic pressures also persist, with Japanese Prime Minister Sanae Takaichi reiterating the need for proactive government spending to stimulate growth and tax revenues, highlighting concerns over a fragile economic recovery.
Trump's Fed Comments Add to US Policy Uncertainty
Adding another layer of complexity to the global monetary policy landscape were comments from US President Donald Trump. In a broadcast from the White House, Trump announced he would soon name his pick to replace Federal Reserve Chair Jerome Powell when his term ends in May. He described his chosen candidate as someone who "believes in lower interest rates, by a lot."
This statement introduces fresh uncertainty regarding the Fed's future path and its cherished independence. While all known candidates for the role, including White House economic adviser Kevin Hassett, former Fed Governor Kevin Warsh, and current Fed Governor Christopher Waller, are seen as favoring lower rates than present levels, none have advocated for cuts as aggressive as Trump's suggestion.
The comments come amid a debate within the Fed itself. Governor Waller pointed to rising job market weakness as room for further rate cuts, contrasting with Atlanta Fed President Raphael Bostic's view that last week's cut was unwarranted.
In other currency movements, the euro was flat at $1.1744. The Australian dollar edged up 0.05% to $0.6607, while the New Zealand dollar dipped 0.2% to $0.5762, largely ignoring data showing the country's economy returned to growth in Q3. In the digital asset space, bitcoin gained 0.6% to $86,509.67.
The collective decisions from the BOE, ECB, and BOJ, combined with evolving political pressures on central bank independence, are creating a volatile cocktail for forex traders, setting the stage for significant market moves as the week concludes.
