The euro extended gains for a third straight session, clearing technical resistance that had constrained the single currency since mid-November as traders digested recent European Central Bank communications emphasizing durability in the disinflation process. The move accelerated in holiday-thinned markets where reduced participation amplified momentum-based flows, with portfolio managers attributing the strength to recalibrated expectations for ECB easing in the first quarter of 2026.
ECB Executive Board member Isabel Schnabel's remarks last week characterizing the eurozone's inflation progress as "broad-based and resilient" resonated through derivatives markets, where risk reversals show the smallest bearish euro bias in six weeks. That contrasts with December's Federal Reserve meeting, where Chair Jerome Powell maintained a cautious tone on the US inflation outlook despite acknowledging progress. The divergence has become the dominant narrative as traders position for January's policy meetings.
"The market is pricing a more confident ECB relative to a Fed that's still hedging its bets," noted a London-based head of G-10 currency trading at a global investment bank. Thin liquidity has exacerbated the move, with algorithms chasing breakouts and corporate hedging flows adding to euro demand. Sterling joined the rally against the dollar, though strategists caution that UK gilt market volatility and questions around debt sustainability may cap gains. The yen held steady as Bank of Japan officials reiterated their patient approach to policy normalization, keeping USD/JPY rangebound.
Technical analysts observe that the euro's breach of its two-month consolidation pattern has triggered follow-through buying, with momentum indicators flashing their most bullish configuration since September. The breakout coincides with positioning data showing leveraged funds reducing short exposure, though real-money accounts remain under-allocated pending conviction that the move extends into 2026. Commodity currencies presented a split picture: the Australian dollar softened on renewed China property sector concerns, while the Canadian dollar held firm as crude prices stabilized near year-to-date highs.
Forward focus turns to the January 15 eurozone inflation report and Fed speakers at the annual conference in Washington, which will test whether the euro's rally reflects fundamental shift or merely year-end positioning artifacts. Options markets price elevated volatility for the first quarter, suggesting traders anticipate the range-break will face substantive challenge once full liquidity returns.
Disclaimer: This analysis is AI-generated for educational purposes. Traders should verify all information and conduct their own research before making trading decisions.