USD edges higher, but records weekly loss

Today’s headlines

What’s happening: The US dollar edged higher on Friday, but recorded losses for the third straight week.

What happened: Investors responded to the Federal Reserve’s interest rate outlook for 2025 and 2026.

The British pound slipped versus the US dollar after data showed a surprise contraction of the UK economy.

Why it matters: Last week, the Fed cut its benchmark interest rates by 25 basis points, in-line with expectations. Less hawkish comments by Fed Chairman Jerome Powell reinforced the sell-off in the greenback on Friday. The bank indicated at least one more interest rate cut in 2026.

The Fed raised its GDP growth outlook from 1.6% to 1.7% for 2025 and from 1.8% to 2.3% for 2026. Although the US central bank revised inflation expectations from 2.9% to 3.0% for 2025, markets consider this being due to temporary factors, like tariffs, rather than the economy overheating. The Fed also cut its inflation outlook from 2.6% to 2.4% for 2026.

The US dollar index, which measures the greenback’s performance versus a basket of major peers, rose slightly to 98.39 on Friday, but recorded losses for the third week in a row.

The index has shed around 1% so far in December and more than 9% year to date, on course to recording its steepest annual decline since 2017.

The EUR/USD forex pair rose to 1.1742, while the GBP/USD fell 0.1% to 1.3372 on Friday. News of UK’s economy shrinking by 0.1% in October, versus market expectations of 0.1% growth, exerted pressure on the British pound.

The USD/JPY forex pair gained around 0.2% on Friday ahead of the Bank of Japan’s meeting this week, with investors expecting a hike in interest rates.

What to watch: Investors will continue monitoring comments from Fed members regarding next year’s interest rate outlook.

Data on non-farm payrolls, retail sales and S&P Global Composite PMI, due to be released on Tuesday, will also remain in focus. US nonfarm payrolls, which surged by 119,000 in September following a 4,000 decline in the previous month, are expected to rise by 55,000 in October and by 35,000 in November. Analysts expect retail sales to grow 0.2% in October, while the S&P Global composite PMI is projected to decline to 53.2 in December from 54.2 in November.

The markets today

Chinese stocks in focus today following key data releases

Context: The Shanghai Composite Index slipped this morning as investors digested the latest economic reports.

Details: Data released this morning showed that China’s surveyed urban unemployment rate came in unchanged from the previous month at 5.1% in November, in-line with market estimates. This kept China’s unemployment rate at its lowest level since June.

China’s retail sales climbed 1.3% year-over-year in November, slowing from October’s reading and market expectations of 2.9%. Annualised retail sales growth was the slowest since December 2022, despite current consumer subsidy programs.

China’s industrial production rose 4.8% year-over-year in November, easing from 4.9% in the previous month. The figure also came below market estimates of 5.0%. This was the softest growth in industrial output since August 2024.

China’s new home prices dipped 2.4% year-over-year in November, following a 2.2% decline in the previous two months. This was the 29th straight month of prices falling.

The Shanghai Composite Index fell 0.11% to 3,884.93 this morning. The data releases from China also dampened sentiment in Hong Kong, taking the Hang Seng Index 0.92% lower to 25,736.53.

What to watch: With no major economic reports due from China today, investors will continue monitoring geopolitical developments and economic reports from the US and EU.

Other Markets: European indices closed lower on Friday, with the FTSE 100, DAX 40, CAC 40 and STOXX Europe 600 down by 0.56%, 0.45%, 0.21% and 0.53%, respectively.

The news shaping the markets

Ukraine’s President Volodymyr Zelenskiy offered to drop its wishes to join the NATO military alliance after holding talks with US envoys to end the ongoing war with Russia. The news sent the USD/RUB pair higher in forex trading this morning.

The Bank of Japan’s sentiment index for large manufacturers rose to 15 in the fourth quarter, from 14 in the third quarter. Business sentiment surging to the highest level since the fourth quarter of 2021 exerted pressure on the USD/JPY forex pair.

New Zealand’s BusinessNZ Performance of Services Index fell to 46.9 in November from 48.4 in the previous month. Services activity reaching its weakest reading in six months sent the NZD/USD pair lower in forex trading this morning.

Germany’s current account surplus fell to €14.80 billion in October from €15.21 billion in the year-ago period, which exerted pressure on the EUR/USD forex pair.

Canada’s wholesale trade surged 0.1% to C$86.0 billion in October, topping market estimates of a 0.1% decline, which sent the USD/CAD pair lower in forex trading this morning.

What else to watch today

Turkey’s budget balance (1200 UAE Time), Eurozone’s industrial production (1400 UAE Time), India’s unemployment rate (1430 UAE Time), Brazil’s IBC-BR economic activity (1600 UAE Time), Canada’s housing starts (1715 UAE Time), inflation rate (1730 UAE Time) and manufacturing sales (1730 UAE Time) as well as US NY Empire State manufacturing index (1730 UAE Time), NAHB housing market index (1900 UAE Time), and NOPA Crush report (2100 UAE Time).