The dollar extended its weekly decline after Federal Reserve officials cemented expectations for a 2026 policy pivot, putting the currency on track for its longest losing streak in three months. The euro and yen strengthened amid widening interest-rate differentials, while commodity currencies displayed mixed performance against the shifting monetary landscape.
Fed policymakers speaking at regional economic forums emphasized a data-dependent approach and hinted at potential easing if inflation continues moderating, traders say. Interest-rate futures now price in a higher probability of cuts by mid-year, according to market participants. The repricing accelerated following December's core PCE data, which showed price pressures cooling more than economists anticipated. "The Fed is laying the groundwork for a pivot," noted a senior rates strategist at a major US bank. "Markets are front-running the policy shift."
The euro gained as European Central Bank officials maintained a cautious stance on monetary easing. Eurozone core inflation remained above the ECB's 2% target in December, while services price growth showed persistence. ECB President Christine Lagarde's remarks at a policy conference reinforced the central bank's patient approach. Sterling also advanced, though gains were tempered by cautious Bank of England commentary on the growth outlook.
The yen advanced on expectations the Bank of Japan will continue normalizing its ultra-loose policy at its upcoming meeting. Japanese wage growth accelerated in December, bolstering the case for further adjustments. "BOJ normalization is becoming self-reinforcing," said a Tokyo-based currency trader. "Each data point makes the next policy adjustment more likely."
Commodity markets reflected the shifting rate outlook. Gold prices climbed as the dollar's retreat boosted the metal's appeal, with investors seeking portfolio hedges. Oil markets remained sensitive to Middle East supply concerns amid ongoing Red Sea shipping disruptions. Bitcoin attracted institutional flows following last year's regulatory approvals in major jurisdictions, with traders noting increased spot ETF activity.
Technical analysts note that momentum indicators suggest the dollar could face additional pressure if upcoming data reinforces the dovish narrative. Market participants are positioning for next week's flash PMI readings and the Conference Board's consumer confidence index. The World Economic Forum in Davos, which convenes global policymakers starting Monday, may generate fresh market-moving commentary. Additionally, liquidity conditions could tighten ahead of Chinese New Year holidays beginning January 29.
Disclaimer: This analysis is AI-generated for educational purposes. Traders should verify all information and conduct their own research before making trading decisions.