On Wednesday (December 18th) during the European trading session, it is expected that the Federal Reserve will reach a consensus to cut interest rates by 25 basis points today, but will also reduce its guidance for next year's rate cuts. We believe that this will keep the US dollar strong until the end of the year, as the interest rate differential remains significant and very favorable for the US dollar. Inflation in the UK rose as expected in November, which will only slightly change the Bank of England's view.

Even if the subtle differences in communication by the Federal Reserve today ultimately bring some dovish surprises, we suspect that the Fed will significantly change its usual cautious stance on guidance. Here are the latest views of ING on the US dollar, euro, and Brazilian real.

US dollar: Trump's policy commitments will be reflected in FOMC

Our view on today's Federal Reserve interest rate statement is that the risks facing the US dollar are roughly balanced, and we believe that there is limited room for unexpected developments to drive major foreign exchange trends. In our view, among the other policies promised by US President elect Trump, the prospect of fiscal stimulus will force a reduction in the expected rate cuts included in the dot matrix forecast, with interest rates lowered by 25 basis points, in line with pricing and consensus.

Even if the subtle differences in communication ultimately bring some dovish surprises, we doubt whether the Federal Reserve will deviate from its generally cautious stance on guidance, which inevitably leads to market expectations of Trump's policy mix (hawkish implications) becoming the main driving factor for interest rate expectations. This means that any potential pullback in the US dollar will not last too long. Also remember, January is a seasonally strong month for the US dollar, and as Trump's term begins, the market may be tempted to establish strategic bullish positions in the US dollar.

Our basic view today is that the Fed's moderate hawkish adjustment in communication will make the market satisfied with the current pricing of the Fed's further meetings: the implied probability of action in March is about 50%, with January remaining unchanged. Ultimately, this could lead to a 2-year USD OIS reaching the 4.0% mark before Christmas, with the USD index approaching 107.0.

EUR: German economy will remain weak until it improves

The latest impact on the growth story of the eurozone - the further decline of the German Ifo index - should keep the dovish bias in the market towards the European Central Bank's pricing unchanged, even as consensus is emerging that the upcoming German elections will bring some degree of fiscal support. Ultimately, a significant narrowing of the Atlantic interest rate spread seems unlikely in the short term.

The EUR/USD continues to hover around 1.050, and we believe this situation is likely to continue until the end of the month. Nevertheless, we are still willing to maintain a negative view of the currency pair in the new year, and the beginning of Trump's second term should provide multiple reasons to remain bearish.

In the UK, the CPI data released this morning showed a year-on-year increase from 2.3% to 2.6%, and a month on month decrease from 0.6% to 0.1%, consistent with market consensus. Our core service indicator, which excludes all unstable factors and rent/hotel (i.e. factors that the Bank of England is less concerned about), has increased from 4.5% to 4.7%. Our view on the euro/pound is roughly flat in the short term, even though the Bank of England's final acceleration of easing policy next year may provide some support.

Brazilian Real: Failed to solve the problem from the source

Despite the Brazilian central bank's significant interest rate hike last week in an attempt to "stay ahead of the curve," the Brazilian real still faces enormous pressure. The Brazilian central bank has participated in multiple rounds of dollar selling interventions, including yesterday's two rounds of selling totaling over $3 billion. The currency market currently expects the Brazilian central bank to raise its policy interest rate from 12.25% to over 16% in the next 6-12 months, and the central bank has to shoulder the heavy responsibility of defending the real. Fortunately, the Brazilian central bank has a large amount of foreign exchange reserves ($330 billion), and at this stage, people are not worried about a lack of available resources to defend the Brazilian real.

However, the root cause of the continuous sell-off of the Brazilian real lies in the fiscal aspect. People suspect that the Lula government will hope to maintain a loose fiscal policy before the 2026 election and will not be shaken by pressure from the Brazilian asset market. It is difficult to see a significant rebound in the Brazilian real unless the Brazilian government is prepared to implement some real fiscal consolidation.

To what extent can BRL fall? In our previous forex conversation, we believed that there were external risks in the 6.50 region. For those who own Brazilian assets, this is a difficult period. However, commodity producers with a cost base in the country currently believe that a one-year direct forward exchange rate above 6.60 is attractive.