On Wednesday (December 18), during the European 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 the guidance for rate cuts next year. We believe this will keep the dollar strong until the end of the year, as the interest rate differential remains significant and is very favorable to the dollar. Inflation in the United Kingdom rose in November as expected, which will only slightly change the view of the Bank of England.

Even if the subtle communication from the Federal Reserve today brings some kind of dovish surprise, we doubt that the Federal Reserve will greatly change its consistently cautious stance in guidance. Here are the latest views from ING Groep on the dollar, euro, and Brazilian real.

Dollar: Trump's policy commitments will be reflected at the FOMC.

Our view on today's Federal Reserve interest rate statement is that the risks faced by the dollar are roughly balanced, and we believe there is limited room for unexpected movements in major Forex rates. In our view, among other policies promised by President-elect Trump, the prospects for fiscal stimulus will force a reduction in the anticipated rate cut included in the dot plot, with a rate cut of 25 basis points, consistent with pricing and consensus.

Even if the subtle nuances of communication ultimately bring some dovish surprises, we doubt the Federal Reserve will deviate from its generally cautious stance on guidance, which inevitably leads market expectations for Trump's policy mix (hawkish hints) to become a major driver of rate expectations. This means that any potential dollar pullback will not last long. It is also important to remember that January is a seasonally strong month for the dollar, and as Trump's term begins, the market may be tempted to establish strategic Call positions on the dollar.

Our fundamental view today is that the Federal Reserve's gently hawkish adjustment in communication will satisfy the market's current pricing for further Federal Reserve meetings: no change in January, with an implied probability of about 50% for actions in March. Ultimately, this could push the 2-year dollar OIS to the 4.0% mark before Christmas, with the dollar index approaching 107.0.

Euro: The German economy will remain weak before improvement.

The latest impact on the Eurozone growth story - the German Ifo Index has declined again - should maintain the market's dovish pricing for the European Central Bank, even as consensus is being formed that the upcoming German elections will bring some degree of fiscal support. Ultimately, a significant narrowing of the Atlantic spread seems unlikely in the short term.

EUR/USD continues to hover around 1.050, and we believe this situation is likely to persist until the end of the month. Nevertheless, we remain negative on this currency pair into the new year, as the start of Trump's second term should provide several reasons to stay bearish.

In the United Kingdom, 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%, in line with market consensus. Our core service indicators, which exclude all volatile factors and rents/hotels (i.e., factors that the Bank of England is less concerned about), rose from 4.5% to 4.7%. Our view on EUR/GBP remains roughly flat in the short term, even though the Bank of England's potential acceleration of easing policies next year may provide some support.

Brazilian Real: Failing to address the issues at their source.

Despite the Brazilian Central Bank's significant interest rate hike last week, trying to "stay ahead of the curve", the Brazilian Real still faces immense pressure. The central bank has engaged in multiple rounds of dollar-selling interventions, including two rounds totaling over $3 billion yesterday. The currency market currently expects the Brazilian central bank to raise the policy rate from 12.25% to above 16% within the next 6-12 months, while in defending the Real, the central bank has to bear a heavy responsibility. Fortunately, the Brazilian central bank has substantial Forex reserves ($330 billion), and at this stage, there are no concerns about a lack of available resources to defend the Brazilian Real.

However, the root of the continuous selling of the Brazilian Real lies in fiscal issues. There are doubts that the Lula government will wish to maintain an accommodative fiscal policy before the 2026 elections, without being swayed by the pressures of the Brazilian asset market. Unless the Brazilian government is prepared to implement some actual fiscal consolidation, it will be hard to see any significant rebound in the Brazilian Real.

How low can BRL go? In our previous Forex discussions, we considered there are external risks around the 6.50 area. It is a tough time for those holding Brazilian assets. However, commodity producers with a cost basis in the country currently find the one-year direct forward exchange rate attractive above 6.60.