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Lower interest rates typically reduce attractiveness of holding a currency for investors as well as reducing governments\u2019 borrowing costs.<\/p>\n
Interest rates are currently lower in the Eurozone and several other major economies than the US \u2014 partly because of their slower growth. <\/p>\n
But policymakers in the ECB and other central banks may be unlikely to lower them further to jump-start growth, since Trump\u2019s trade war has proven to be less damaging to US trading partners than previously thought.<\/p>\n
Swap market prices currently imply on average a hike of 0.1 percentage points in the Eurozone by the end of next year. By contrast, at the end of last week, they indicated a 0.04 percentage point cut.<\/p>\n
The \u201cglobal tariff shock has turned out to be a lot more benign than originally anticipated\u201d, said Tomasz Wieladek, chief European macro strategist at asset manager T Rowe Price. \u201cCentral banks around the world are gradually becoming more hawkish.\u201d<\/p>\n
Bloomberg on Monday reported<\/a> remarks from ECB board member Isabel Schnabel that she was \u201crather comfortable\u201d with investor bets on an Eurozone rate increase next year.<\/p>\n The hawkish shift helped to push up global bond yields on Monday, with the German 10-year Bund yield jumping 0.07 percentage points to 2.87 per cent, while there were similar moves in other European bond markets. The 10-year Bund yield rose another 0.01 percentage points on Tuesday morning to 2.88 per cent, in line with other European markets.<\/p>\n Investors will be keenly watching this week\u2019s Fed meeting for any signal about its future intentions. The central bank has come under sustained pressure from President Donald Trump to lower borrowing costs.<\/p>\n \u201cAssuming that the Federal Reserve stays in dovish mode\u2009.\u2009.\u2009.\u2009a turn in the policy rate cycles overseas should be another factor contributing to a mildly weaker dollar in 2026,\u201d said ING\u2019s Chris Turner.<\/p>\n The dollar was flat against a basket of major currencies on Tuesday.<\/p>\n Better than expected economic data has combined with pockets of inflation, such as elevated<\/a> services inflation in the euro area, to erode the case for further rate cuts. <\/p>\n Strong November jobs data in Canada has prompted traders to ascribe a small chance of a rate rise that could come early next year. <\/p>\n Markets are also pricing in a small possibility of a February rate increase by the Reserve Bank of Australia, after robust household spending data last week.<\/p>\n In Japan, which has been raising rates since last year, traders are now pricing in at least two quarter-point increases by the end of 2026, after the latest hints<\/a> from its central bank governor earlier this month.<\/p>\n Traders are expecting the BoE to cut rates by a quarter-point from the current 4 per cent at its meeting next week. But there is only one further quarter-point cut fully priced beyond that.<\/p>\n