In December, the United States’ five-year consumer inflation expectation aligned with predictions, remaining at 3.2%. This suggests a stabilisation in consumer expectations over the medium term.
Various markets showed different movements during this period. The price of silver reached new highs, nearing $67.50, while gold rose to $4,350 amidst steady safe-haven purchasing despite a firm US dollar. The USD/JPY exchange rate increased, with the yen weakening after a Bank of Japan rate hike, and the pound sterling fell due to unsatisfactory UK data.
The Broader Financial Market
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With 5-year inflation expectations holding steady at 3.2%, the immediate surprise for the market is gone. This figure, coming in right as forecast, suggests a period of accepted, persistent inflation above the Fed’s old target. We see this as a signal to shift focus from the inflation number itself to the Federal Reserve’s reaction function in the new year.
The Fed’s Cautious Tone
The Fed’s cautious tone means rate cut timing is the big question for early 2026. Looking back at the pivot of late 2023, we saw how quickly markets priced in cuts, and derivative markets are now doing the same, with Fed Fund futures implying at least two cuts by mid-year. Options on SOFR futures could be a good way to position for a Fed that moves either faster or slower than currently anticipated.
Gold trading at $4,350 an ounce shows a massive flight to safety and a deep-seated fear of long-term currency debasement, dwarfing the previous records set back in 2024. This rally seems overextended, and buying protective put options on gold miners or futures contracts could be a wise hedge against a sharp correction. Selling covered calls against existing long positions is another strategy to generate income while this consolidation plays out.
In the currency markets, the Yen’s slide after the Bank of Japan’s recent rate hike shows how powerful interest rate differentials remain. We see the USD/JPY pair as a key carry trade, but the risk of further intervention from Japanese authorities is high. Using options collars, which involve buying a put and selling a call, could protect a long USD/JPY position from a sudden reversal while capping upside.
As we head into the final trading weeks of the year, low liquidity can create choppy conditions. The CBOE Volatility Index (VIX) has been hovering around 17, which isn’t panic but reflects underlying uncertainty about central bank policy in 2026. This is a time to use derivatives to define risk, not to take on large, unhedged directional bets.
