USD pulls back as risk-on mood boosts GBP – OCBC

The safe haven US Dollar (USD) lost ground after an early firm start, tracking the broader risk-on mood, while Pound Sterling (GBP) outperformed G10 peers overnight, OCBC’s FX analysts Sim Moh Siong and Christopher Wong note.

Fed cuts and AI growth shape market outlook

“Despite stronger risk assets, gold surged as markets digested US intervention in Venezuela and a softer ISM manufacturing PMI, which reinforced expectations for a Fed rate cut. Higher global oil prices suggest that markets appear to be focused – for now – on a near-term disruption in Venezuelan oil production due to the ongoing naval blockade and sanctions rather than prospects of a recovery in oil output amid potential increase in US-led investments.”

“Beyond geopolitics, we expect markets to remain fixated on AI-driven growth and the Fed’s next steps. The year begins with a divided Fed after three consecutive 25bps cuts since Sep 2025. The median dot signals one cut in 2026, but markets price two cuts and a 40% chance of a third, leaning dovish—partly on expectations of a leadership shift after Fed Chair Powell exits in May.”

“US growth prospects may improve on AI-led investment, fading tariff drag, and tax cuts, tempering expectations for further easing beyond the final 25bp Fed cut we see in 1Q26. This could support USD later in the year. The labour market remains key, with this Friday’s December US jobs report in focus.”