Financial markets are treading water this morning ahead of the year’s last Federal Reserve decision. US Treasury yields and the dollar are holding in narrow trading ranges, equity markets are pushing higher, and commodity prices are moving sideways.

Market participants are nearly unanimous in expecting the Fed to deliver a “hawkish cut” this afternoon. After a series of data releases showing labour markets losing momentum and inflation holding steady, policymakers are widely believed likely to lower the federal funds target range by a quarter point to 4.25-4.50 percent – but the “dot plot” summary of economic projections is seen signalling a shallower path of rate cuts in the year ahead. Traders think the median participant will pencil in three moves over the course of 2025–down from four in September—but more than the two currently discounted in futures markets.

Any deviation from consensus—in the dot plot or the post-decision press conference—could hit markets hard as year-end rebalancing flows intersect with extreme valuations across a number of asset classes. Chair Powell has proven adept at avoiding market turbulence, but the stakes are high going into today’s meeting.

The British pound is back on the back foot even after inflation climbed in November, bolstering odds on a pause in the Bank of England’s easing cycle. According to the Office for National Statistics, the headline consumer price index climbed 2.6 percent in the year to November—matching market expectations—and services inflation held at 5 percent, allowing policymakers very little room for manoeuvre in cutting rates.

Brazil’s real is inching higher but remains under severe selling pressure as investors turn sceptical on the country’s fiscal outlook. The currency has plummeted in recent months in line with a series of spending pledges from the left-leaning President Luiz Inacio Lula da Silva, and the central bank’s efforts to stall the decline have thus far come to naught. Policymakers raised rates by a full percentage point earlier in the month, promised two more to come by March, and intervened at least four times in local bond markets to stop the bleeding.

The Canadian dollar is holding near post-pandemic lows after Donald Trump took to uttering trade threats on social media at 3:23 am this morning, repeating statements made on Meet the Press earlier this month. “No one can answer why we subsidize Canada to the tune of over $100,000,000 a year?,” he said. “Makes no sense! Many Canadians want Canada to become the 51st State. They would save massively on taxes and military protection. I think it is a great idea. 51st State!!!”

This is almost wholly incorrect*. The numbers quoted are well above the $72 billion USD goods imbalance recorded in 2023. The president-elect is missing the services sector, which runs a surplus with Canada. And the trade deficit is not a “subsidy”, it simply reflects the fact that Americans (who are far wealthier) buy more from Canadians (who are far poorer) than vice versa.

Hoping that arithmetic will prevail probably isn’t a good strategy for those exposed to the Canadian dollar’s movements. Elected US policymakers have in recent days mistaken the Orion constellation for a drone swarm and a Star Wars X-Wing mockup for a captured drone. The subtleties of international trade may be a stretch.

More trade threats are likely, and the loonie is vulnerable to further losses. A break above the 1.45 threshold cannot be ruled out in the next month and a half.

But any self-explanatory trade should come with a warning: moves in foreign exchange markets rarely follow clear-cut macroeconomic logic, given that currency valuations are determined by a complex range of factors operating within an incredibly chaotic system. Case in point: since the early-November presidential election, the currencies that were almost-universally expected to fall—like the Mexican peso and Chinese yuan—have held up relatively well, while others have taken a serious beating. The Canadian dollar, for all its travails, has put in a middle-of-the-pack performance.

With the US dollar trading at clearly overvalued levels, a counter-intuitive move could eventually play out. As Bertrand Russell put it, “Obviousness is always the enemy of correctness”.