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2025 Market Outlook: Key January Events to Watch 
The FX market is still torn between contradictory forces. Market-implied rate cut expectations (as expressed by the Fed funds futures) have not changed much; but market participants still anticipate roughly two-and-a-half rate cuts by year-end, with the first step due at the Fed meeting in two weeks. But just like after the latest labor-market report, USD bulls were hoping for a change of direction after yesterday’s strong retail sales, even though Fed Chairman Jerome Powell confirmed his stance in his speech yesterday. He said that the Fed would act as appropriate to sustain expansion – a statement which was previously understood as a rate-cut announcement. Hence, while the US dollar is trading firmer on the back of the healthy data, the Fed focuses mainly on the significant uncertainties for the US economy.
A period of relative calm and low EMFX vol broadly indicates that market participants could continue to unwind costly FX hedges, many of which in Latin America, and particularly in a context of supportive central banks. The global central bank dovishness reduces the probability of large EMFX weakness in our view, despite low growth.
Contemplating such monetary policy surfaces, many analysts are in calculations of truncating EM FX hedging portfolios as the policy easing balances slower growth. It looks like we are in for a period of relative calm where weak growth data remains balanced by supportive central banks, in an environment of low yields.
The outcome of the G20 meetings of end-June was much in line with what markets anticipated and have arguably not changed opinions of the likelihood of a US-China deal. Growth indicators still point to the downside, but the Fed remains on course to ease in the upcoming months according to our US economists.
While the market is already aggressively pricing the next year of cuts in the US, we believe the overall backdrop should remain supportive for the duration in local markets and without the need to FX hedge for now.
