Recent key U.S. economic data has strengthened market expectations for two Federal Reserve rate cuts in 2026. On December 16, the U.S. Bureau of Labor Statistics reported an unexpected rise in November's unemployment rate to 4.6%, the highest level since September 2021. This development has prompted traders to bet on two Fed rate cuts in 2026, which would bring the benchmark rate down to 3%-3.25%. Following the jobs data release, the U.S. dollar index plunged below 98 for the first time since October 6.
The Fed implemented its third 25-basis-point rate cut of the year in December, continuing its easing cycle. With expectations mounting for two additional cuts in 2026, the benchmark rate could decline further, potentially weakening the dollar and boosting non-dollar currencies. The Chinese yuan has already strengthened past 7.05 against the dollar, reaching 7.045, and may return to the 6-range in 2026.
The accelerated Fed easing comes in response to cooling U.S. labor market conditions. Revised data shows August nonfarm payrolls were cut by 26,000 (from -4,000) and September gains reduced to 108,000 (from 119,000). October retail sales growth also missed expectations, signaling potential economic slowdown. These factors, combined with tariff-induced inflation pressures, have raised concerns about weakening consumer spending and economic growth.
As the Fed's actions often set global monetary policy trends, the People's Bank of China may implement timely reserve requirement ratio (RRR) and interest rate cuts to maintain policy flexibility. Such measures would support capital markets through lower rates and increased liquidity.
Meanwhile, the Bank of Japan is expected to raise rates for the first time since January, potentially lifting the overnight call rate by 25 basis points to 0.75% - its highest level in three decades. Market focus has shifted to how the BOJ will signal future rate paths, as even at 0.75%, rates would remain below neutral levels. The move could strengthen the yen, though dovish guidance might reverse gains and potentially trigger currency intervention if USD/JPY approaches 160.
As year-end approaches, market volatility reflects normal profit-taking rather than trend reversal. Analysts anticipate China's current bull market could extend for 3-5 years, with technology, new energy, and consumer sectors leading growth. The tech rally, already underway, is expected to remain a key 2026 theme alongside dividend stocks, consumer blue chips, and industrial sectors.
Global investment banks have turned bullish on Chinese equities, anticipating increased foreign inflows into undervalued A-share and Hong Kong markets. Recent economic planning meetings outlined policies to stabilize traditional industries while boosting innovation in AI, semiconductors, and clean energy - creating new growth drivers and investment opportunities.