An eventful start to 2026
Only a few days into the New Year and it’s already proving eventful. Not surprisingly perhaps, given the experience of the past year, Donald Trump is central to developments as the US takes over the ‘running’ of Venezuela. The market reaction is relatively muted so far with oil prices just a little lower and the dollar a touch firmer, though the weekend’s events are a reminder that geopolitical uncertainties remain ever present. Meanwhile, the coming week will be important in shaping expectations for Fed interest rates, and hence the direction for markets for the next while, with a heavy schedule of economic data due culminating in the US jobs report for December on Friday. In FX, the euro kicks off the week trading at $1.1690, off its best levels in December but within the range of $1.15 to $1.18 that has prevailed for the majority of the time since the middle of 2025, while sterling is also a touch lower against the US currency this morning, trading at around $1.3430. EURGBP is hovering around the £0.87 level, having drifted gradually lower during the course of December.
The main central banks held their final monetary policy meetings of 2025 in December, with the ECB staying on hold again (at 2%) and the Fed and Bank of England (BoE) both cutting their respective policy rates by 25bps (to 3.5-3.75% and 3.75%). Current market expectations at the start of this year envisage the ECB remaining firmly on hold in 2026 and the Fed and BoE lowering rates further, by a bit more than 50bps in the case of the Fed and by a bit less than 50bps in the case of the BoE, though the next cut from both is not fully priced in until early in the second quarter of the year.
Notwithstanding the Fed rate cut, US government 10-year bond yields backed up during December, increasing by around 15bps, though they remained with the range of circa 4%-4.25% in place since September. Equivalent German yields increased by almost 20bps last month to a 2025 high of 2.90%, while UK 10-year bonds outperformed with yields rising by 5bps to just under 4.5%. Yields generally continued to edge higher on Friday and are only marginally lower this morning notwithstanding the weekend’s developments in Venezuela.
Fed member Paulson says she sees “inflation moderating, the labour market stabilizing and GDP growth coming in around 2 percent this year,” adding that “if all of that happens, then some modest further downward adjustments (to interest rates) would likely be appropriate later in the year.”
Looking to the week ahead, there’s a heavy schedule of US economic data due. As well as Friday’s jobs report, the ISM manufacturing and services surveys are published today and Wednesday respectively, while the ADP employment report (December) and job openings data (November) are published on Wednesday. In the Euro area, a flash reading for December inflation is due on Wednesday also.