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Key Highlights

• GBP/USD gained pace for a move above the 1.3350 resistance.
• A key bullish trend line is forming with support at 1.3325 on the 4-hour chart.
• EUR/USD rallied above 1.1650 and 1.1680.
• USD/JPY saw a bearish reaction after the Fed rate cut of 0.25%.

GBP/USD Technical Analysis

The British Pound started a strong increase above 1.3320 against the US Dollar. GBP/USD even cleared the 1.3350 barrier to enter a positive zone.

Looking at the 4-hour chart, the pair settled above the 1.3350 level, the 100 simple moving average (red, 4-hour), and the 200 simple moving average (green, 4-hour). A high was formed at 1.3392, and the pair is now consolidating gains.

There is also a key bullish trend line forming with support at 1.3325. Immediate resistance sits near 1.3390. The first key hurdle is seen near 1.3400.

A close above 1.3400 could open the doors for a move toward 1.3450. Any more gains could set the pace for a steady increase toward 1.3500. On the downside, there is key support at 1.3340 and the 50% Fib retracement level of the upward move from the 1.3287 swing low to the 1.3392 high.

The next support is 1.3325 and the trend line. A close below 1.3325 could open the doors for a test of 1.3280. The main support sits near the confluence zone at 1.3220, and the 100 simple moving average (red, 4-hour).

Looking at EUR/USD, the pair gained pace for a strong increase and was able to clear the 1.1680 resistance zone.

Upcoming Key Economic Events:

• US Initial Jobless Claims - Forecast 220K, versus 191K previous.

The FOMC is optimistic on growth and inflation. Westpac sees uncertainty on both fronts.

The FOMC cut the fed funds rate by 25bps to a midpoint of 3.625% at their December meeting as the market had hoped. However, the Committee held to September’s projection of just one more cut in 2026 and another in 2027 to a broadly neutral rate of 3.125% by end-2027 compared to the market’s expectation for a return to neutral policy by end-2026.

Warranting a slow normalisation of policy, the FOMC now expects above-trend growth in 2027 (2.3% from 1.8% in September) and 2028 (2.0% from 1.9%), arguably because of support for consumption from real income growth and as the AI-related infrastructure build out continues. In the press conference, Chair Powell also noted that 0.2ppts of growth had been transferred from 2025 to 2026 because of late-2025’s Government shutdown. The unemployment rate profile is little changed, expected to grind lower to the full employment level of 4.2% in 2028.

The Committee showed little concern over the inflation outlook, with a measured descent in annual core inflation forecast from 3.0% in 2025 to 2.5% in 2026, then 2.1% in 2027 and 2.0% in 2028. In effect, moderately restrictive policy is expected to prove successful over time, allowing the FOMC to meet both sides of its mandate.

Westpac believes the US faces material capacity constraints across power, logistics and other essential services owing to a lack of breadth in business investment and given migration reform. We expect this constraint to hold activity growth around trend, versus the FOMC’s more optimistic view, and to result in greater persistence in inflation and associated risks.

Our forward view for the fed funds rate is consistent with the FOMC’s for 2026, with the cut most likely to come in early-2026 before inflation’s persistence becomes a concern. But thereafter we expect the Committee to remain on hold at 3.375% and for inflation risks to bias up long-term yields, along with growing fiscal uncertainty.

EURCHF: ⬇️ Sell

• EURCHF reversed from resistance area
•  Likely to fall to support level 0.9300

EURCHF currency pair recently reversed up from the resistance area between the resistance level 0.9390 (former monthly high from September), upper daily Bollinger Band and the 50% Fibonacci correction of the downward impulse from April.

The downward reversal from this resistance zone stopped the previous minor ABC correction ii from November.

Given the overbought daily Stochastic and clear daily downtrend, EURCHF currency pair can be expected to fall to the next support level 0.9300.

CHFJPY: ⬆️ Buy

• CHFJPY reversed from pivotal support level 192.60
•  Likely to rise to resistance level 195.50

CHFJPY currency pair recently reversed up from the support zone between the pivotal support level 192.60 (former monthly high from October) and the support trendline of the daily up channel from October.

The upward reversal from this support zone started the active impulse wave 3 of the intermediate impulse wave (3) from the start of November.

Given the overriding uptrend on the daily charts, CHFJPY currency pair can be expected to rise to the next resistance level 195.50 (which stopped wave 1).

Summary

• As expected, the FOMC reduced the fed funds target range by 25 bps to 3.50%-3.75% and signaled that additional easing will face a higher bar at its next meeting on January 28.
• The post meeting statement signaled this higher bar to future cuts by noting it was now considering the "extent and timing" of additional adjustments. The suggestion that the FOMC would not be so ready to cut the policy rate again in the near term likely helped to limit the number of hawkish dissents to two (Presidents Goolsbee and Schmid). Governor Miran again dissented in favor of a 50 bps cut.
• Despite two hawkish dissents and the dot plot revealing four other regional bank presidents preferred to hold the policy rate steady today, the Committee maintains an easing bias. The updated Summary of Economic Projections showed the median estimate for the policy rate at the end of next year to be 3.375%, unchanged from September.
• The expectation among most members to ease next year reflects projections for the unemployment rate to be a touch above most participants' estimate for full employment next year, while inflation resumes its progress back toward—albeit not all the way to—the FOMC’s 2% target. The Q4-2026 median projection for the unemployment rate was unchanged at 4.4%, while the median estimate for headline and core PCE inflation ticked down to 2.4% and 2.5%, respectively. More noticeable was the median estimate for GDP growth next year rising half a percentage point to 2.3% on a Q4/Q4 basis, putting it closer to our above-consensus estimate of 2.5%.
• There is a slew of economic data between now and the next meeting on January 28, and we will be monitoring it closely and adjusting our forecast as conditions warrant. Our base case remains that the current easing cycle is not over yet but rather that it is entering a slower phase. We continue to look for two more 25 bps cuts from the FOMC next year at the March and June meetings.
• The Federal Reserve also announced the beginning of reserve management purchases (RMPs) in an effort to maintain short-term interest rate control, keep bank reserves ample and ensure the smooth functioning of financial markets. Fed officials have been clear for months that this step in no way represents a change in the stance of monetary policy. We agree with this assessment, and the beginning of RMPs will have no bearing on our view of the stance of monetary policy.

A Cut to Close out the Year

As expected, the FOMC reduced the fed funds target range by 25 bps to 3.50%-3.75% at the conclusion of its December meeting. As was also anticipated, the decision was not unanimous. Three voting members did not support the policy decision, with dissents registered in both a more hawkish and dovish direction. Specifically, Governor Miran dissented in favor of a steeper, 50 bps cut, while Presidents Schmid (Kansas City) and Goolsbee (Chicago) dissented in favor in keeping the policy rate unchanged.

The dispersed views on the best course of action reflect the tricky environment the FOMC finds itself in. The FOMC did not have several key readings on the economy as originally scheduled due to the government shutdown (e.g., Q3 GDP, Oct. & Nov. Employment Situation and CPI, etc.). But, the latest data available continue to indicate some tension in the Committee’s employment and inflation mandates (Figures 1 & 2).

With 75 bps of cuts since September and policy not as clearly restrictive, the bar for additional easing has been raised. In the post meeting statement, the Committee gave itself more optionality around future cuts, saying that "In considering the extent and timing of additional adjustments to the target range...", with the emphasized text new to the statement. The suggestion that the FOMC will not be so ready to cut rates again in the near term likely helped to limit the number of hawkish dissents.

The Summary of Economic Projections did signal some broader unease among the Committee besides the two hawkish dissents. The dot plot revealed that six participants in total did not favor reducing the policy rate at today's meeting, implying four non-voting regional presidents also preferred to hold the policy rate steady. Nonetheless, a bias toward further easing persists among the Committee. The median dot for year-end 2026 and 2027 remained at 3.375% and 3.125%, respectively. The longer-run median was unchanged at 3.00%, with the dot plot illustrating that all but two participants see the current policy rate at least somewhat restrictive.

The biggest change to the SEP was a major upward revision to the 2026 growth outlook, with the median projection rising from 1.8% to 2.3%. Some of this change likely reflects the government shutdown, with Q4-2025 real GDP growth expected to see a material drag, setting the economy up for a bounce-back in Q4-2026. That said, this dynamic cannot fully explain the change, and it puts the median FOMC participant closer to our above-consensus forecast of 2.5% real GDP growth next year. Elsewhere, the changes generally were smaller, with some modest downward revisions to the inflation forecasts next year, and no change to the median longer run projections for the real GDP growth and the unemployment rate.

The Federal Reserve also announced that it will begin growing its balance sheet again in the coming days through the purchase of Treasury bills. As we have discussed previously, these purchases are meant to maintain short-term interest rate control, keep bank reserves ample and ensure the smooth functioning of financial markets. Fed officials have been clear for months that this step in no way represents a change in the stance of monetary policy. We agree with this assessment, and the beginning of reserve management purchases (RMPs) will have no bearing on our view of the stance of monetary policy.

Specifically, the central bank announced that RMPs will begin on December 12 with an initial pace of $40 billion for the month. The post-meeting guidance stated that "the pace of RMPs will remain elevated for a few months to offset expected large increases in non-reserve liabilities in April. After that, the pace of total purchases will likely be significantly reduced in line with expected seasonal patterns in Federal Reserve liabilities." Our working assumption has been that the medium term, "equilibrium" pace of RMPs will be $25 billion per month to keep bank reserves ample. We read the above guidance as indicating that RMPs will downshift to roughly this pace starting in the spring. If realized, the Fed's balance sheet will grow by roughly $370 billion in 2026, and the reserve-to-GDP ratio will be 9.7% at the end of next year, comfortably above the lows in September 2019 when repo markets blew up (Figure 6).

Our base case remains that the current easing cycle is not over yet but rather that it is entering a slower phase. While the labor market is far from collapsing, the softening in conditions to the wrong side of "maximum employment" supports policy returning to a more neutral position. Directional progress on inflation next year should resume as the initial lift from tariffs fade, which would reduce the tension between the FOMC's employment and inflation mandate. We continue to look for two 25 bps rate cuts next year at the March and June meetings. Next week's economic data, specifically the "one and a half" employment report on Tuesday and the November CPI on Thursday, will be key to the outlook. We will have reports out previewing these data releases in the coming days.

The Federal Reserve Open Market Committee (FOMC) reduced the federal funds rate by 25 basis points (bps), lowering the target range to 3.5%-3.75%. The move comes after consecutive quarter-point cuts at each of the prior two meetings.

There were minimal changes to the statement. However, a slight tweak to the reference to further rate cuts reinforced a more hawkish tone. The bolded portion reflects the revised verbiage: "In considering the extent and timing of additional policy adjustments to the target range" – suggesting a higher bar for further policy easing.

The statement also noted that, "the Committee judges that reserve balances have declined to ample levels and will initiate purchases of shorter-term Treasury securities as needed to maintain an ample supply of reserve on an ongoing basis".

Accompanying the statement, the FOMC also released a revised set of economic forecasts, known as the "Summary of Economic Projections" (SEP). The SEP represents the median of the individual forecasts submitted by each of the FOMC participants. Relative to the September update:

• The median projection for real GDP growth – as measured on Q4/Q4 basis – was upgraded to 1.7% (previously 1.6%) in 2025, 2.3% in 2026 (previously 1.8%) and 2.0% (previously 1.9%) in 2027. The long-term outlook remained unchanged at 1.8%.
• The median year-end unemployment forecast for 2025 and 2026 were unchanged at 4.5%, and 4.4%, respectively, while 2027 was nudged lower to 4.2% (previously 4.3%).
• Core PCE inflation – the Fed's preferred inflation gauge – was revised a touch lower to 3.0% for 2025 (previously 3.1%) and to 2.5% in 2026 (previously 2.6%) but was unchanged at 2.1% for 2027.
• Lastly, the median projection for the federal funds rate was kept unchanged and suggest just one additional quarter-point cut in both 2026 and 2027.

Nine of the twelve FOMC members voted in favor of today's decision. Stephen Miran (again) dissented in favor of a larger 50 bps cut, while Jeffrey Schmid and Austan Goolsbee voted for no change to the policy rate this meeting. The last time there were three dissenters at a policy decision was in 2019.

Key Implications

A lot of ink had been spilt leading up to today's announcement of whether the Fed would or would not cut rates for a third consecutive meeting. While the FOMC ultimately decided to push forward with another cut, the statement and accompanying projections had a hawkish tilt, suggesting a higher bar for future rate cuts. This view is likely to be further reinforced by Chair Powell at the press conference, which will start at 2:30 PM ET.

Fed futures were little changed following the announcement, with the next cut not fully priced until June – a view that aligns to our forecast. But it's hard to have much conviction in that call in the absence of timely economic data. November's employment and CPI reports (to be released on December 16th and 18th, respectively) will shed some much-needed light on recent hiring and inflation trends and could materially shift our view and market pricing on the extent and timing of further policy easing. Stay tuned!

The Fed cut interest rates by 25bps to 3.50–3.75%, fully in line with expectations. The decision was done by a three way split. Governor Stephen Miran again voting for a larger 50bps reduction. Meanwhile Chicago Fed Austan Goolsbee and Kansas City Fed Jeffrey Schmid voted for no change. All other policymakers supported the quarter-point move.

The new projections signaled remarkable continuity. The federal funds rate path was left unchanged, with policymakers still expecting the policy rate to fall to 3.4% by the end of 2026, then 3.10% by the end of 2027, and remain there through 2028. This implies one 25bps cut per year in both 2026 and 2027.

Growth expectations, however, were revised meaningfully higher. GDP is now projected to expand 2.3% in 2026, up from 1.8% previously, and to grow 2.0% in 2027 and 1.9% in 2028. Labor-market projections were largely steady, with unemployment expected to be 4.4% in 2026, unchanged from prior forecasts. The rate for 2027 was nudged down from 4.3% to 4.2%, with 2028 left at 4.2%. Policymakers continue to signal a soft-landing baseline, where job markets cool without a material rise in unemployment.

Inflation projections were modestly lowered. Headline PCE is now expected at 2.4% in 2026, down from 2.6%, while the forecasts for 2027 and 2028 remain at 2.1% and 2.0%. Core PCE was trimmed to 2.5% for 2026 and left unchanged thereafter.

Full Fed statement and SEP.

Available indicators suggest that economic activity has been expanding at a moderate pace. Job gains have slowed this year, and the unemployment rate has edged up through September. More recent indicators are consistent with these developments. Inflation has moved up since earlier in the year and remains somewhat elevated.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. Uncertainty about the economic outlook remains elevated. The Committee is attentive to the risks to both sides of its dual mandate and judges that downside risks to employment rose in recent months.

In support of its goals and in light of the shift in the balance of risks, the Committee decided to lower the target range for the federal funds rate by 1/4 percentage point to 3-1/2 to 3‑3/4 percent. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

The Committee judges that reserve balances have declined to ample levels and will initiate purchases of shorter-term Treasury securities as needed to maintain an ample supply of reserves on an ongoing basis.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Susan M. Collins; Lisa D. Cook; Philip N. Jefferson; Alberto G. Musalem; and Christopher J. Waller. Voting against this action were Stephen I. Miran, who preferred to lower the target range for the federal funds rate by 1/2 percentage point at this meeting; and Austan D. Goolsbee and Jeffrey R. Schmid, who preferred no change to the target range for the federal funds rate at this meeting.

The Bank of Canada delivered a well-telegraphed, widely-expected hold today, keeping the overnight rate at 2.25%—the bottom of the neutral range and where we expect it will remain through the end of 2026.

The decision was after upward GDP revisions in the Q3 GDP release dating back to 2022, and a string of positive labour market surprises that saw a key indicator of the output gap, the Canadian unemployment rate, drop from 7.1% in September to 6.5% in November.

As much as recent data has been encouraging, we see it as reaffirming our cautiously optimistic base case rather than a fundamental shift in the Canadian economic outlook, and continue to expect a gradual recovery in the economy and labour market supported by the 275 bp rate reduction from the BoC since June 2024.

That outlook broadly aligns with the BoC's. Governor Macklem said in the press conference to expect modest growth and slow absorption of economic slack, while reiterating its holding bias.

Looking back, Canadian economic growth has already tracked toward the more optimistic end of the range of possibilities that the BoC projected in April, thanks to a combination of CUSMA exemptions shielding the bulk of goods exports to the U.S., and underlying resilience in household spending.

With that, we think the BoC is done with rate cuts, and that the next change in interest rates is more likely to be a hike. Our base case assumes this won't occur until 2027, but risks are tilted toward an earlier move.

What are the risks that could lead inflation to deviate from 2%?

BoC’s assessment that today’s policy rate is “at the right level” rests on a key assumption that “ongoing economic slack to roughly offset cost pressures associated with the reconfiguration of trade”, leaving inflation tracking around the 2% target.

We agree with that assessment, but have also argued that robust consumer demand growth could keep underlying price pressures elevated next year.

By most measures, the economy still has excess supply—it can produce more than is currently demanded. This creates downward pressure on inflation as businesses compete for limited demand. Still, recent data already suggests a smaller (albeit still negative) output gap than previously expected.

Consumer purchases have also broadly held onto resilience this year and could remain a source of strength if not upside risks to our growth and inflation forecast in 2026, following improvements in labour market conditions. That could lessen the disinflationary pressures relative to what was expected.

Offsetting that is the cost of "trade reconfiguration"—Canadian producers are not directly paying tariffs, but still face cost increases for managing trade complications, investing in alternative sources or partners, and absorbing higher prices from U.S. counterparts through integrated supply chains.

On both fronts, we see risks mostly tilted towards more inflationary pressures, not less. If either of those risks were to materialize more tangibly, risks of BoC rate hikes as early as H2 2026 rise.