The safe-haven US dollar (USD) lost ground after an early strong start, tracking the broader risk-on mood, while the pound sterling (GBP) outperformed its G10 peers overnight, OCBC forex analysts Sim Moh Siong and Christopher Wong noted.
Fed cuts and AI growth shape market expectations
“Despite strong risk assets, gold rose as markets digested US intervention in Venezuela and a weaker ISM manufacturing PMI, boosting expectations for a Fed rate cut. Rising global oil prices suggest that markets appear to be focused – for now – on near-term disruption to Venezuelan oil production due to the ongoing naval blockade and sanctions rather than the prospects for an oil production recovery amid a potential increase in US-led investment.”
“Beyond geopolitics, we expect markets to remain focused on AI-led growth and the Fed’s next steps. The year starts with a divided Fed after three consecutive 25 basis point cuts since September 2025. The midpoint points to one cut in 2026, but markets are pricing in two cuts and a 40% chance of a third cut, leaning toward caution — in part due to expectations of a leadership shift after Fed Chair Powell’s exit in May.”
“US growth prospects may improve on AI-led investment, fading tariff burden, and tax cuts, tempering expectations for further easing after the Fed’s final 25 basis point cut we see in 1Q26. This may support the US dollar later in the year. The labor market remains key, with the December US jobs report in focus on Friday.”
