US: Further Tariff Headlines Spark USD Rally, CNH Weakness

• Following the powerful selloff in GBP this morning, which prompted cable to fall to the lowest level since April, the pound has spent the majority of the US session consolidating near session lows, below 1.2350. As noted, 1.2300 and 1.2266 will remain the near-term technical targets for the move. In similar vein, EURGBP remains well bid towards the 0.8350 highs.
• HSBC believe that with high debt, a flatlining economy, rapidly fading fiscal space and a wide current deficit, GBP faces major headwinds. Higher yields increase the government’s interest expenditure and could mean chancellor Reeves is forced to either raise taxes, cut spending and/or borrow more to meet spending commitments. They highlight that in the current environment, higher yields add downside risks to the UK economy and to GBP going forward.
• ING think the sell-off in gilts looks to be more a function of factors peculiar to the bond market than investors demanding a risk premium of UK assets per se. Therefore, they don’t view this as the start of a chapter of independent sterling weakness and retain their forecasts that EURGBP will not stray too far from the 0.82/83 region this year. 0.8450/8500 could be the extent of the current correction should market positioning have further to unwind. ING acknowledge 1.2250 is very possible in cable, but 1.20 looks a bit of a stretch.

MNI has prepared the following Instant Answers questions, results published immediately after the Minutes release at 1400ET/1900UK:

• Did several or more participants say they could support a hold at the December meeting?
• Is this sentence from the November minutes altered to reflect a different number of participants: "Almost all members agreed that the risks to achieving the Committee's employment and inflation goals were roughly in balance."
• What proportion of the Committee incorporated assumptions about future government policy in their projections?
• Did the FOMC discuss ending QT at an upcoming meeting?

• Balance Of Risks: The diffusion indices of participants' uncertainty assessments released with the projections showed that FOMC officials were much more concerned about inflation risks than they were in September. Even if the Statement didn’t change its assessment of the balance of risks (“roughly in balance”), we will be watching to what degree the following sentence changes from the November meeting minutes: "Almost all members agreed that the risks to achieving the Committee's employment and inflation goals were roughly in balance."
• Eye On QT: As largely expected at the meeting, the Fed adjusted the offer rate on the overnight reverse repo facility down 5bp vs other administered rates, explaining "setting this rate at the bottom of the target range for the federal funds rate is intended to support effective monetary policy implementation and the smooth functioning of short‑term funding markets.” While the minutes are likely to still show that the FOMC considers reserves to be “abundant”, we wonder whether there was a broader discussion about balance sheet policy going into the New Year as QT continues to run in the background.
• There is widespread expectation that QT will end by mid-2025: for example the NY Fed’s November survey of Primary Dealers had a median expectation of runoff ending at May, with the central range being between March and July; the Market Participants survey saw it ending in March, with the central expectation being between January and June. As such, the FOMC may have to start laying the groundwork for a smooth end to QT.