Game, set and match!

The macro point

It was an open secret. The American Federal Reserve (Fed) lowered its key interest rate by 25 basis points between 3.50% and 3.75% at its meeting last Wednesday. However, the direction that American monetary policy will take in 2026 is more uncertain.

A minority of FOMC members (the decision-making body) are concerned about a potential return of inflation, which nonetheless struggles to materialize in the figures. Others anticipate a strong recovery in American growth next year thanks to investments in artificial intelligence. For them, there is no reason to rush to lower the cost of money. Finally, the majority seem worried about the slowdown in the job market and some statistics indicating increasing difficulties for Americans in making ends meet. For example, 17% of American households are behind on paying their electricity bills, which have risen due to massive consumption by data centers. They logically advocate for lower short-term rates (Fed rates) to support economic activity.

Another factor to consider. J. Powell, who chairs the FOMC, is due to leave office next spring. Will his replacement, chosen by Donald Trump, massively lower rates as the White House desires, or will he take his independence like Powell?

In our view, the cycle of reducing US short-term rates is not over. We estimate the terminal rate to be around 3% - which means that the Fed could still lower rates by at least 50 basis points, probably in two stages. This is our central scenario, which takes into account slightly elevated inflation (around 3%) and resilient American growth but with signs of fragility, particularly in the labor market. We doubt that the Fed, starting in the spring, will implement massive rate cuts of 50 or even 100 basis points - as some members of the Trump administration have suggested in recent months. For this to happen, an economic or financial crisis would be necessary. No one believes it. We remain on the side of reason.

In the eurozone, economic activity is still stable, but stagnant. Many analysts hope for a strengthening of growth in 2026, especially if the massive savings accumulated by Europeans is finally injected into the real economy. In France, the rise in the savings rate is linked to three phenomena: the full indexation of pensions, the very clear rebound in capitalized interest on savings products (such as Livret A), and the role of housing credit (a more marginal factor, however). For several years, economists have expected this abundant savings to stimulate economic activity. In vain. Unfortunately, we do not see what would be different in 2026. It is likely that economic activity in the eurozone will remain sluggish, weighed down by weak demand and also by Chinese competition increasingly targeting the flagships of our industry, due to a lack of protective measures. The slow economic decline of Europe is likely to continue...

Technical point

On the currency market, the dollar has been somewhat aided by tensions in the bond market - the rise in long-term rates is a signal of risk aversion, which favors the greenback. It is likely that the bond theme will remain present next year. The Bloomberg consensus still expects EUR/USD to continue its rise in the coming months, with a target of 1.18 in Q1 2026 and 1.20 in Q2. Beware, the consensus has often been wrong in the past so it is also worth considering, as part of a currency hedge, a scenario where EUR/USD could weaken next year. Currency market developments this year have shown us that we can have erratic large-scale movements, including on major pairs.

However, if there is one pair whose direction leaves no doubt, it is EUR/JPY. We are still positioned to the upside, with a possible target at 183.50.

Announcements to follow

Central banks are still on the agenda this week.

The Bank of England (BoE) is expected to cut its key rate by 25 basis points - this is already priced in. According to us, two additional cuts are possible in the first half of 2026. The monetary policy decoupling between the BoE and the European Central Bank (ECB) should favor a decline in the pound sterling. We estimate that the EUR/GBP pair could soon reach 0.89.

The ECB is also meeting. However, there is no issue at stake. Economists are debating among themselves the opportunity of another 25 basis point rate cut. What is certain is that this scenario is not endorsed by the Governing Council at the moment. The main policy rate is expected to remain unchanged following Thursday's meeting.

Uncertainty is highest at the Bank of Japan (BoJ). For several months, the money market has been betting on a rate hike to strengthen the Japanese yen and support inflation. For a long time, deflation was Japan's main problem. However, we doubt that a rate increase will occur in December. The Japanese government, which oversees the BoJ, opposes it. Why? The stimulus plan presented in November will largely be funded by debt issuance on the bond market. It is therefore preferable for rates to remain low. Moreover, inflation has returned to the archipelago and is starting to reach levels that penalize the most vulnerable (hence the anti-price rise measures planned in the stimulus plan). This does not mean that a BoJ rate hike will never happen. But it is unlikely this year. The yen should therefore logically remain weak for a while against the euro and the US dollar.

The information presented in this publication is provided for informational purposes only and does not constitute investment advice, an offer to sell, or a solicitation to buy, and should not be considered as an incentive to engage in any investment whatsoever.