Week Ahead: US Rate Cut in Focus

The calm on the charts masks a brewing risk. If policymakers from the Bank of Japan (BoJ) signal even a small shift in tone, the yen carry trade that has fuelled global markets could unwind with force.

The blackout period prevents Fed members from managing expectations, leaving the market with one clear assumption, taht is, the Fed is easing. While the projected 3.75% is already priced, the Summary of Economic Projections and Powell’s tone will determine how far markets extend the easing narrative into 2026.

The dot plot will be crucial. Traders need confirmation that the Fed aligns with the aggressive path already priced by the market. Any hesitation could force repricing across currencies and risk assets.

Quantitative Tightening (QT) Ends and Liquidity Turns

The termination of QT marks the return of supportive liquidity conditions.

13.5 billion dollar repo injection from the Fed, the second largest since the pandemic, signals stress in the financial system. History shows that once QT ends under strain, QE often follows. While consensus expects a formal QE return in 2026, the path may depend on leadership changes as Powell’s term ends in May 2026.

Prediction markets place Kevin Hassett as the leading candidate for the next Fed chair with a 74% probability. If nominated early, the market may begin trading on the stance of the incoming chair rather than Powell’s guidance. This dynamic could accelerate expectations of earlier and deeper easing.

Central Bank Highlights: BOJ, RBA and BOC

While US policy is shifting toward accommodation, several overseas central banks add layers of uncertainty to market stability. BoJ remains the key risk, lining up alongside important signals from the Reserve Bank of Australia (RBA) and Bank of Canada (BoC) this week.

If the BoJ raises rates from 0.5% to 0.75% on 19 December, the narrowing spread between Japan and the United States would make yen-funded carry trades more expensive to unwind. Such a circumstance could force investors to sell US assets to settle yen liabilities, creating the conditions for a fast, disorderly correction.

This risk mirrors the volatility episodes of past carry-trade squeezes.

A BoJ-driven shock, however, would likely push the Fed toward even deeper easing or an earlier reactivation of QE to stabilise liquidity. Short-term pressure would therefore contrast with a potentially bullish longer-term tailwind for risk assets.

Beyond Japan, traders should also watch the policy tone of the RBA and the overnight rate of the BoC, both of which may influence cross-asset sentiment, especially if they reinforce or contradict the global easing narrative.

Upcoming Events

For full view of upcoming economic events, check out VT Markets’ Economic Calendar.

Key Movements of the Week

USDX

• USDX trades around the 99.10 monitored area where bearish price action is expected.
• If price moves higher, traders should watch 99.40 for renewed bearish structure.
• Downside continuation opens interest at 98.50.

EURUSD

• A move lower into 1.1605 offers a zone to watch for bullish reactions.
• Upside structure may encounter resistance at 1.1710.

GBPUSD

• GBPUSD rejected the 1.3405 monitored area.
• Continued consolidation lower may target 1.3250 for bullish price action.

USDJPY

• USDJPY has traded above the descending trendline.
• If price moves higher, traders should monitor 156.00 for a potential bearish reaction.

Gold (XAUUSD)

• Gold moved higher before reversing lower.
• Key level remains 4175 for near-term reactions.
• If consolidation deepens, the next bullish zone sits near 4070.

SP500

• SP500 broke above the 6888 swing high.
• Traders should monitor how price behaves within the ascending channel.

Bitcoin (BTCUSD)

• Bitcoin turned lower after breaching the 93,156 swing high.
• If consolidation continues, upside structure is monitored once price retakes 90,277.

Bottom Line

The week ahead sits at the crossroads of shifting US policy and rising overseas risk. The expected Fed cut, paired with the end of QT, returns liquidity to the centre of market behaviour, while the next move from the BoJ could unsettle positions built on years of cheap yen funding.

Trading conditions may tighten or open up quickly as these forces collide.

With that in mind, the focus turns to the message from the Fed, the signals from the plumbing of the financial system, and how price reacts around the major zones mapped across USD pairs, indices, commodities, and crypto.

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