The euro advanced for a third consecutive session as traders positioned for a potentially hawkish shift from the European Central Bank, with policymakers breaking their silence on persistent price pressures in the eurozone. The move contrasted sharply with underperformance across commodity-linked currencies, which buckled after Chinese manufacturing data signaled a slower-than-expected recovery in the world's second-largest economy.
Market participants noted that recent comments from ECB Governing Council members have struck a markedly different tone from the dovish tilt that characterized December's policy meeting. "The rhetoric has evolved noticeably in the past two weeks," said a senior currency strategist at a major European bank. "We're hearing genuine concern about services inflation stickiness and wage growth momentum." Traders have responded by reducing short-euro positions that had built up toward year-end, with positioning data showing the most significant unwind since October.
The Australian dollar led declines among G10 currencies, sliding against both the greenback and the Japanese yen as China's official manufacturing PMI fell short of consensus forecasts. The weak print reinforced concerns that Beijing's stimulus measures have yet to gain traction, dampening appetite for currencies tied to Chinese commodity demand. The Canadian dollar also faced headwinds despite crude oil holding recent gains, with investors focusing on the Bank of Canada's upcoming decision and its implications for the domestic housing market.
Technical analysts observed that the euro's rally has cleared key moving-average resistance levels against the dollar, with momentum indicators flashing bullish signals for the first time since November. The currency's strength has been particularly pronounced against the antipodean pairs, where EUR/AUD has broken out of a month-long consolidation pattern. Meanwhile, the yen has maintained its firm undertone amid speculation that the Bank of Japan could adjust its yield curve control parameters as early as its January 20 meeting, though officials have remained characteristically noncommittal.
Looking ahead, markets will scrutinize Thursday's release of eurozone unemployment figures and Friday's US consumer sentiment data for further directional cues. Traders are also positioning for next week's ECB account of its December meeting, which could provide additional clarity on the internal debate surrounding the inflation outlook. The divergence between central bank trajectories appears set to dominate currency flows in the near term, with the ECB potentially joining the Bank of England in pushing back against aggressive rate-cut pricing while the Federal Reserve maintains its data-dependent flexibility.
Disclaimer: This analysis is AI-generated for educational purposes. Traders should verify all information and conduct their own research before making trading decisions.