Currency markets are trading cautiously as participants prepare to close the books on 2025, with many cutting exposure ahead of a week laden with economic data and central bank event risks. The dollar is adding to last week’s losses amid a debate over whether the next meaningful move comes from a narrowing in cross-currency rate differentials or a hawkish repricing in US growth expectations, trading volumes are turning choppy amid year-end rebalancing flows, and measures of implied volatility are showing a small uptick as investors prepare for unexpected moves.

Here in North America, a number of key data releases are set to clarify the macroeconomic handoff into next year and determine positioning:

After Federal Reserve chair Jerome Powell’s unexpectedly-dovish performance during last week’s post-decision press conference, market bets on two or more rate cuts in 2026 could hinge on the strength exhibited in tomorrow’s long-delayed non-farm payrolls reports. Economists estimate that roughly 130,000 federal employees who accepted deferred-resignation offers earlier this year likely exited payrolls in October. Offsetting that drag, the private sector is thought to have added around 80,000 jobs per month in October and November, leaving the three-month rolling average for employment growth near 50,000. The unemployment rate—unavailable for October—is expected to rise to about 4.5 percent in November from 4.4 in September.

Due for release at the same time, October’s retail sales update should show American consumers continuing to do what they do best. Headline receipts are seen rising 0.3 percent month-over-month while the control group—excluding autos, gas, building materials, and office supplies—might print above 0.5 percent, in line with trends estimated from higher-frequency Johnson Redbook numbers.

On Thursday, the latest consumer price index report might bear the imprint of tariff increases, but should also show declines in key services categories, keeping overall inflation pressures somewhat restrained. After skipping a month, forecasters think both headline and core measures climbed 3.1 percent year-over-year in November, ratifying Powell’s expectation for a modest-but-transitory rise in American price levels through the early part of next year.

Closer to the North Pole, this morning’s November consumer price index release and Friday’s October retail sales report could add fuel to the nascent “buy-Canada” trade—even if, in our view, that enthusiasm is likely premature. Signs of a modest acceleration in headline inflation to around 2.3 percent year-over-year, particularly if accompanied by evidence of resilient consumer spending in Statistics Canada’s advance November sales estimate, could embolden rate hawks and add to bets on a hike by next October—currently 93 percent priced in. That, in turn, would leave the Canadian dollar on firmer footing into year end. We remain skeptical—given wider policy uncertainties, it is difficult to envision Canadian policymakers actively tightening while their US counterparts are still easing—but markets have been known to entertain less plausible narratives, and sentiment has shifted sharply over the past week.

Central banks elsewhere are set to generate their own drama:

The Bank of England is seen delivering a narrowly-supported rate cut on Thursday. After a series of softer data releases, including wages, employment, inflation, and growth in the last two months, Governor Bailey—often the swing voter on the Monetary Policy Committee—is likely to join the doves in endorsing an easing in policy, but could also lobby for a change in communications that prevents a sharp decline in the exchange rate. With the Bank Rate approaching neutral and underlying inflation pressures remaining too hot for comfort, officials may choose to replace a statement sentence that previously referred to a “gradual downward path” for rates with language warning of greater conditionality ahead and a more balanced case for policy adjustments. We think this could keep the pound reasonably rangebound.

Policymakers at the European Central Bank are overwhelmingly expected to stay on hold later the same morning, leaving market participants focused on what Madame Lagarde and her counterparts say about the policy trajectory in 2026. Updated staff projections should show upward revisions to growth and core inflation, with the current policy setting seen keeping the central bank in a “good place,” for now, but officials will also want to avoid ratifying market speculation surrounding rate hikes, especially after last week’s explicit comments from uber-hawk Isabel Schnabel. Lagarde is likely to maintain her support for a data-dependent, meeting-by-meeting approach, and may even warn investors that further cuts could be on the table in the event of a slowdown in growth—a step that could take some air out of the euro’s recent ascendance.

Mexico’s central bank will follow through later in the day with what might be a true “hawkish cut”. Traders see officials voting by a 3-2 margin to ease policy further, while also revising inflation expectations upward, and adding more conditional language to the forward guidance embedded in the official statement. Although the Mexican peso has risen sharply in the last few weeks in line with a clear acceleration in inflation pressures and a recovery in carry trade activity, we would warn that there are storm clouds ahead that could limit its gains in 2026—particularly those being generated north of the Rio Grande. An acknowledgment of these risks by Banxico officials could see the currency lose some altitude on Thursday.

Lastly, the Bank of Japan is almost certain to deliver a hike on Friday morning, raising rates to their highest levels in three decades. After guiding markets to expect the move over the last month, officials led by Governor Kazuo Ueda are likely to respond to intensifying inflation pressures and a weak yen with an increase in the policy rate from 0.50 to 0.75 percent, and may pair this with a slightly-higher estimate of the “neutral rate”—the rate that neither speeds nor slows economic growth—in its accompanying communications. We see this helping support the yen, but don’t see the exchange rate rallying to a huge degree, given that investors have been preparing for this moment for a long time.

Against this backdrop, we would warn market participants that the divergence in central bank policy now priced in for next year won’t be sufficient to drive exchange rate performance. If Fed easing in 2026 unfolds as currently discounted, it should not, on its own, be a decisive headwind for the dollar, given that its effects are likely already incorporated in spot rates. It’s the unexpected developments in coming months that will drive currency markets, not what is already understood. As Warren Buffett’s mentor Ben Graham once observed, “​​Everyone* on Wall Street is so smart that their brilliance offsets each other. Consequently, what happens in the future represents what they don’t know”.

*This was clearly a kind exaggeration.