Weekly FX Outlook: Liquidity Turns & December Policy Divergence Takes Centre Stage

December opens with a clear shift in global FX dynamics.
The Federal Reserve has formally ended its quantitative tightening programme and injected over $13B in liquidity through overnight repos, marking one of the largest operations since the pandemic. This pivot in the Fed’s balance-sheet stance has been far more influential for markets than the upcoming December rate cut itself. 

The liquidity shift has fuelled a broad risk-on tone, extended the S&P 500’s seven-month winning streak and weakened the dollar for a tenth consecutive session.
Currency performance is no longer defined by simple yield differentials but by how each currency responds to a new liquidity regime where risk appetite, growth expectations and policy divergence are interacting in real time. 

High-beta currencies are benefiting. Defensive currencies are lagging, and the next wave of volatility will be shaped by what the Fed signals for 2026, not the rate cut that is already fully priced in.  

The dollar enters the week on the back foot, weakened by a combination of softer economic data, a weaker labour market and a material shift in liquidity conditions. 

Labour Market Softens Further. The November ADP report showed job losses rather than gains, driven almost entirely by small businesses is historically a leading indicator of cyclical turning points. This reinforces the idea that US economic resilience is increasingly concentrated in a handful of large AI-driven corporates, while the broader economy slows. 

Markets now assign an overwhelming probability to a Fed rate cut this week, but the real driver of dollar direction is the Fed’s 2026 path, where internal FOMC divisions remain significant. Some members continue to focus on sticky inflation. Others highlight growing labour-market fragility. 

If the dot plot signals a shallower 2026 easing path, the dollar may stabilise. If it signals a deeper easing path, the dollar’s decline could accelerate. 
Liquidity Dynamics Cannot Be Ignored and the Fed ending QT and adding liquidity through repos has weakened the dollar more effectively than any data release. This liquidity regime supports risk-taking, compresses volatility and encourages rotation out of defensive safe havens. For now, USD remains vulnerable, and short-term positioning favours further softness unless Powell’s guidance unexpectedly pushes back against market expectations.  

The euro enters the week with constructive momentum driven by three reinforcing factors such as improving European data, ECB stability and widening policy divergence with the US. 

Eurozone business activity expanded at its fastest pace in over two years, with the composite PMI revised materially higher. Industrial production has also firmed, providing a clearer signal that the region’s cyclical downturn may be bottoming out. 

The ECB is widely expected to hold rates unchanged and crucially, to avoid signalling any urgency to ease next year. This contrasts sharply with the Federal Reserve, where cuts are already underway and more are expected in 2026. That divergence remains the anchor of EUR strength.

Market positioning has shifted decisively: the euro is now one of 2025’s top-performing G10 currencies, supported not only by USD weakness but by meaningful improvements in European macro stability. Christine Lagarde’s appearance this week is unlikely to disrupt the trend. A steady message from the ECB, alongside a dovish Fed, keeps the euro’s short-term outlook modestly positive, with downside pullbacks likely to remain contained unless US policy surprises.  

Sterling enters the week in a stronger position, supported by improving domestic data, a calmer fiscal environment and a reduction in UK-specific risk premium following the Autumn Budget. The upward revision to the UK services PMI suggests economic activity has held up better than initially feared. Bond markets have digested the Budget without stress, allowing gilt yields to stabilise and removing a key overhang for sterling. On the policy front, markets expect the Bank of England to cut rates in December and again in early 2026.
This expectation is unlikely to move materially unless this week’s MPC commentary deviates from the emerging consensus. Governor Bailey’s remarks later in the week will be a central focus for rate-path clarity. Sterling remains rangebound but recovering, benefiting from lower US yields and a broader global risk-on mood.
However, the medium-term picture still reflects the UK’s structural headwinds: limited growth potential, tightening fiscal policy and a labour market that is softening rather than rebounding. In the near term, sterling behaves more like a moderate risk-on currency, rising when USD and JPY weaken which is a dynamic that remains intact as the week begins. 
 

The yen has regained some ground as expectations build for a Bank of Japan rate hike in December. Multiple government officials have indicated that a move is likely, marking one of the most significant policy shifts in years. Yet beyond December, uncertainty dominates. Markets price only one additional rate increase next year and assign roughly 50% probability to another. Even with a December hike, Japan remains the lowest-yielding environment in the G10, meaning carry trades remain attractive and yen rallies risk stalling unless global sentiment weakens. Fiscal expansion in Japan could also put upward pressure on government bond yields, but the BOJ remains cautious, and this caution limits the sustainability of any yen appreciation. Short term, JPY may benefit from the policy event but Medium term, the structural story still leans toward underperformance in a risk-on world.  

The Canadian dollar enters the week with renewed strength after a substantially better-than-expected employment report. The data reinforces expectations that the Bank of Canada will hold rates steady at its upcoming meeting, with little urgency to cut. In a global environment driven by risk appetite, liquidity and policy divergence, CAD tends to perform well as a mid-beta, commodity-linked currency. The domestic data backdrop is supportive, and the Bank of Canada’s credibility on inflation remains intact. For the week ahead, the near-term outlook for CAD is constructive, particularly as markets see limited policy shifts through 2026. Canadian fundamentals, combined with broader USD softness, continue to favour gradual CAD resilience.  

The Australian dollar and New Zealand dollar remain central beneficiaries of the risk-on environment. 

The RBA meets this week with expectations centred on a steady decision.  Markets, however, have shifted sharply toward a more hawkish medium-term view, pricing the next policy move as a hike rather than a cut. AUD remains one of the strongest performers in high-beta FX. If the Fed reinforces the easing narrative this week, AUD stands to benefit more than most. 

The RBNZ’s recent message that further cuts are unlikely and hikes remain a possibility, has transformed NZD sentiment. Short-term rates have repriced significantly higher, creating a more supportive backdrop for the currency over the medium term. NZD is now a favoured buy for several institutional desks, particularly as the global risk environment improves.  

The shift in Fed policy has redefined the winners and losers across G10 FX. 

Beneficiaries of risk-on liquidity: 

Underperformers:
 

This hierarchy remains intact and should continue to drive cross-currency flows throughout December, especially as central bank policies diverge further.
 
Lamera View: What Matters for Clients This Week
The week ahead is shaped by three intersecting forces:
 

Our directional bias:
 

The final weeks of the year will continue to be defined by liquidity, divergence and the sequencing of 2026 policy expectations.
 These forces favour selective opportunities, particularly in high-beta and policy-stable currencies.
 
Clients seeking precision timing for execution or hedging should consider that volatility around the Fed, ECB and BoE remains a central feature but the broader direction of travel across G10 FX is becoming clearer.