CITIC SEC's research report notes that compared to the V-shaped reversal in market expectations for Fed rate cuts observed in November, the macroeconomic narrative for developed economies showed no significant changes in December. While the U.S. unemployment rate rose and CPI inflation cooled unexpectedly in November, neither development altered market expectations for Fed easing, with both CITIC SEC's overseas macro team and CLSA forecasting the Federal Reserve will pause its rate-cutting cycle in January 2026. Economic sentiment in the Eurozone continues to decline, indicating persistently weak growth momentum. Against a backdrop of the European Central Bank maintaining unchanged interest rates, Germany's upward revision to its bond issuance scale, and political instability in France, CITIC SEC's overseas macro team recommends maintaining a cautious stance on long-dated European sovereign bonds. The Bank of Japan raised interest rates by 25 basis points as expected in December 2025, bringing the policy rate to a 30-year high of 0.75%, and both CITIC SEC's overseas macro team and CLSA project Japan's policy rate will reach 1% within 2026. South Korea's growth outlook appears to be improving, with inflation likely to persist slightly above the target rate, leading CLSA to anticipate a 25 basis point rate cut by the Bank of Korea in January 2026.

The U.S. dollar is on track to record its largest annual decline in eight years, with investors believing that if the next Fed Chair implements deeper-than-expected interest rate cuts, the greenback could weaken further.

Year-to-date, the Bloomberg Dollar Spot Index has fallen 8.1%. The dollar slumped after Trump announced "Tariff Liberation Day" in April and has remained under pressure as he aggressively maneuvers to ensure the appointment of a dovish Fed Chair next year.

"The Fed will be the biggest factor influencing the dollar's direction in the first quarter. This includes not only the January and March meetings but also who will succeed Jerome Powell as Fed Chair after his term ends," said Yusuke Miyairi, a forex strategist at Nomura.

With the market having already priced in at least two rate cuts for next year, a diverging policy path from some other developed economies has further diminished the dollar's appeal.

Data from the U.S. Commodity Futures Trading Commission for the week ending December 16 shows that positioning on the dollar returned to a bearish stance this month after a brief period of optimism; pessimistic views have dominated the market since April's tariffs sparked concerns about the U.S. economy.

For now, everything hinges on the Fed's next moves and who will replace Powell.

"Hassett, as the long-time frontrunner, is largely priced in; however, a Warsh or Waller appointment might lead to slower rate cuts, which would be more favorable for the dollar," said Andrew Hazlett, a forex trader at Monex Inc.