The dollar weakened across major pairs as traders adjusted positions for a more aggressive Federal Reserve easing cycle in 2026, while the euro strengthened on contrasting ECB rhetoric. The divergence in central bank messaging has fueled renewed selling pressure on the greenback, with market participants increasingly pricing in a lower terminal rate than previously anticipated.
Recent comments from Fed officials have opened the door to more substantial policy accommodation next year, according to traders. "The market is catching up to the idea that inflation progress may allow for a faster pace of cuts," said one senior currency strategist at a major European bank. Meanwhile, ECB President Lagarde's firm pushback against rate cut speculation has bolstered euro sentiment, with policymakers highlighting sticky core inflation in the Eurozone. The Bank of Japan continues signaling its gradual normalization path, adding to downward pressure on USD/JPY as rate hike expectations for 2026 firm.
Technical momentum has turned decisively against the dollar, with EUR/USD breaking above key moving averages that had capped gains since October. Momentum indicators show bullish divergence forming on daily charts, while positioning data reveals hedge funds have slashed long-dollar exposures to the lowest levels in three months. Gold has rallied sharply as real yields compress, with the precious metal drawing safe-haven inflows amid the dovish Fed repricing. Oil markets remain volatile ahead of this week's OPEC+ meeting, with supply concerns from Middle East tensions offsetting demand worries.
Trading desks note that liquidity conditions are thinning as the year-end approaches, potentially amplifying price moves. "We're seeing classic holiday position-squaring, but the directional bias is clear," noted a head of FX trading at a New York-based firm. Key risks ahead include Friday's US employment report and next week's CPI data, which could either validate or reverse the current dovish Fed narrative. The ECB meeting minutes due Thursday will be scrutinized for confirmation of the hawkish hold, while geopolitical developments continue to loom over commodity markets.
Disclaimer: This analysis is AI-generated for educational purposes. Traders should verify all information and conduct their own research before making trading decisions.