As the trading year winds down ahead of the Christmas holiday season, it’s worth taking a moment to reflect on what drove the markets over the last twelve months to get a baseline for what to expect in the year ahead. One aspect to consider is a couple of trends that had an underlying impact on the markets in 2025, and could come to more prominence in the months ahead.
There were many events this year that captured headlines, which perhaps allowed a couple of themes to go less noticed. They are somewhat related as both touch on the outlook for central banks. The first is the shifting dynamics in government debt and bond yields. The second is the divergence in economic growth and, by extension, in monetary policy.
Government Debt is a Rising Concern
Several significant events this year affected the markets, each in its own way. Those include the Autumn Budget in the UK, the government shutdown in the US, the no-confidence vote against and reappointment of the French Prime Minister, and the elections in Japan. At first glance, there might not seem to be much correlation between them. However, the primary source of dissonance that precipitated the potential political crises was government spending amid high debt levels.
Investors, increasingly concerned about high levels of government debt, have pushed up long-term yields. That’s because they are demanding a premium to tie up their money, which has the practical effect of making government debt less attractive. As a result, other safe havens have skyrocketed in price, such as precious metals. This, in part, explains the meteoric rise in gold (up over 60% in a year), the fastest appreciation of the yellow metal in several decades.
The Debt Outlook Is Grim
The debt situation is far from resolved and may worsen next year. In many cases, to avoid a political crisis, countries resolved to increase spending or to make fewer cuts. Or relied on rosy predictions for economic growth in 2026 that assured enough revenue for government spending plans. For example, while the U.S. government has endured its longest shutdown to date, Congress has not yet passed a regular budget for the current fiscal year. That means he political crisis could return.
This connects to the second theme of the year that could be more pronounced in 2026. The post-pandemic economic landscape left most major countries with sluggish growth and high inflation. Central banks, almost in unison, raised rates to curb consumer prices. But some reached their inflation targets in 2025, ending that era of parallel moves by the major central banks.
The Diverging Economic Outlook
Inflation and growth rates across major global economies have diverged, which means central banks will have to pursue divergent policies to address their domestic conditions. For forex traders, this means larger currency swings are likely. For example, while the BOJ is cautiously raising rates, the BOE is on an easing footing. Meaning that the interest rate between those two currencies will be on a convergence path, and that could move the GBPJPY substantially lower.
The ECB is now expected to raise rates sometime next year amid an economic growth spurt, while the Fed continues to ease policy as the labour market cools. This could provide substantial tailwinds for the EURUSD going forward. Meanwhile, commodity countries are looking at China for more domestic stimulus to prop up its economy.
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