The dollar advanced for a fourth consecutive session as traders priced in a higher probability of an extended Federal Reserve pause, buoyed by November inflation data that exceeded economist forecasts. The move unfolded in holiday-thinned liquidity conditions, amplifying directional moves as market participants repositioned for a potential shift in the 2026 policy outlook.
Fed speakers this week emphasized data dependency and patience, with several officials noting that progress on disinflation has stalled. The commentary followed hotter-than-expected core PCE figures released earlier this month, prompting money markets to pare back expectations for rate cuts next year. Strategists at major banks now see the Fed on hold through the first half of 2026, a stark contrast to the ECB's more dovish tilt amid weakening eurozone growth indicators. "The policy divergence trade is back in focus," said a senior currency analyst at a New York-based trading firm. "Markets are recalibrating the Fed's reaction function while the ECB appears cornered by growth risks."
The widening rate differential narrative weighed on EUR/USD, which tested multi-month lows as bearish momentum accelerated. GBP/USD faced similar pressure, compounded by soft UK retail sales data that fueled speculation of a more cautious Bank of England. Meanwhile, USD/JPY climbed as the Bank of Japan's gradual normalization path appeared insufficient to offset the dollar's yield advantage. Commodity markets reflected the stronger greenback, with gold retreating from recent peaks as real yields ticked higher. Crude oil held steady despite OPEC+ signals of potential supply adjustments, while Bitcoin consolidated near recent trading range highs as institutional flows remained constructive.
Technical analysts note that the dollar index has cleared key resistance levels, with momentum indicators suggesting room for further upside. However, traders caution that positioning has become stretched, raising the risk of a sharp reversal on any dovish Fed surprise. The focus now turns to December's FOMC minutes and eurozone CPI data for directional cues. Geopolitical tensions in the Middle East and ongoing US-China trade dialogues continue to provide underlying support for the dollar's safe-haven appeal, though any de-escalation could quickly unwind the recent gains. Market participants are also watching for potential year-end rebalancing flows that may counter the current trend.
Disclaimer: This analysis is AI-generated for educational purposes. Traders should verify all information and conduct their own research before making trading decisions.