The ECB may lift its eurozone growth forecasts at next week’s final policy meeting, with President Christine Lagarde noting the economy has been outperforming earlier expectations. Markets still expect rates to stay at 2%, though recent hawkish comments—especially from Isabel Schnabel—have led traders to scale back expectations for 2026 rate cuts, even if many economists view pricing in hikes as premature given potential deflationary forces. The discussion comes amid broader debates about diverging Fed–ECB policy paths and differing exposure to political pressure. Adding to geopolitical tension, former EU diplomat Josep Borrell criticized the new U.S. National Security Strategy as a political “declaration of war,” urging Europe to recognize the increasingly adversarial stance.

USDJPY has slipped after the Fed’s rate cut as markets focused more on Powell’s caution about labor-market risks than on the Fed’s stated “high hurdle” for further easing. While the Fed still projects one more cut next year, markets expect two, and attention now turns to the BOJ, where a hike next week is widely priced in—any delay could trigger sharp yen weakness. Yet one Japanese bank notes that lingering doubts about the BOJ lifting rates toward 1% or higher continue to cap yen strength, with investors waiting for a clearer hawkish signal. Former BOJ official Hayakawa expects a hike to 0.75% in December and gradual tightening toward a 1.5% terminal rate, especially as Japan’s large fiscal package raises inflation risks. A key watch is whether the BOJ revises its estimate of the neutral rate, which would shape how restrictive future policy could become.

Australia’s November jobs report softened AUD sentiment as employment unexpectedly fell by 21,300, reversing October’s temporary strength. The jobless rate held at 4.3%, slightly better than forecasts, but largely due to a dip in participation. Economists caution that markets may have been too quick to price in 2026 rate hikes, noting risks of rising unemployment if labor demand weakens while population growth stays strong—potentially paving the way for rate cuts if inflation cools. Still, monthly employment data is volatile; the more influential Q4 CPI due January 28 is expected to show inflation staying uncomfortably high. Until then, markets may continue buying AUD on dips, anticipating policy divergence between the RBA and the Fed.