The dollar is trading at multi-month lows against major currencies as market participants increasingly bet the Federal Reserve will cut interest rates more aggressively than previously anticipated in 2026. The shift in sentiment follows recent communications from Fed officials that analysts interpret as opening the door to a policy pivot, contrasting sharply with the European Central Bank's cautious stance on monetary easing.
According to interest rate futures markets, traders have added to Fed rate-cut bets for the second half of 2026, with some strategists now projecting up to 75 basis points of easing by year-end. This repricing accelerated after several Fed speakers in early January emphasized the importance of maintaining labor market strength even as inflation remains above target. Meanwhile, ECB policymakers have maintained a more hawkish tone, with recent comments suggesting the central bank will move more slowly on rate cuts given persistent wage pressures in the eurozone services sector.
The policy divergence is most evident in EUR/USD, where the pair has broken above its 200-day moving average and is testing key resistance levels that have capped rallies since late 2025. Technical analysts note that momentum indicators show bullish divergence, suggesting the move may have further to run. GBP/USD is also gaining ground, supported by resilient UK economic data and expectations that the Bank of England will lag both the Fed and ECB in any easing cycle. In contrast, USD/JPY remains under pressure as the interest rate differential between US and Japanese assets narrows, though the Bank of Japan's own policy normalization path continues to create two-way volatility.
Commodity markets are reflecting the dollar's weakness, with gold trending higher for a third consecutive week as investors seek alternative stores of value. Oil prices remain rangebound amid conflicting signals from global demand forecasts and ongoing supply concerns. Bitcoin has consolidated recent gains near its highest levels since late 2025, with crypto traders citing the softer dollar environment as supportive for digital assets. Looking ahead, market participants are focused on Friday's US PMI data and next week's Fed policy meeting minutes for further clarity on the central bank's thinking.
Disclaimer: This analysis is AI-generated for educational purposes. Traders should verify all information and conduct their own research before making trading decisions.