The euro extended its advance against the dollar on Thursday, building on momentum from the European Central Bank's decision to maintain its benchmark rate at restrictive levels while Federal Reserve officials signaled greater flexibility on future policy adjustments. The move reflects growing conviction among market participants that monetary policy divergence will favor the single currency heading into 2026.
ECB President Christine Lagarde reinforced the central bank's data-dependent approach during her post-meeting press conference last week, emphasizing that underlying inflation pressures in the services sector remain sticky despite headline figures moderating toward the 2% target. "The Governing Council stands ready to adjust all of its instruments to ensure inflation returns to target in a sustainable manner," Lagarde said, language that strategists interpret as maintaining a hawkish bias even as growth indicators soften across the eurozone.
Meanwhile, US economic data released Wednesday showed initial jobless claims trending higher for a fourth straight week, fueling speculation that the Fed's 525 basis points of cumulative tightening is finally transmitting more forcefully through the real economy. Treasury yields have retreated across the curve, with the 2-year note under particular pressure as traders price in a higher probability of rate cuts by March. "The market is increasingly focused on the lagged effects of Fed policy," said a senior G10 currency trader at a major Wall Street bank. "That dynamic naturally creates headwinds for the dollar."
Technical analysts note that EUR/USD has cleared several key moving averages in recent sessions, with momentum indicators flashing bullish signals. The pair has also breached the upper bound of a month-long consolidation range that had confined price action since mid-November. Options markets reflect the shift in sentiment, with risk reversals showing growing demand for euro calls versus puts over one- and three-month tenors. However, liquidity conditions are expected to deteriorate heading into the holiday period, potentially amplifying volatility on any unexpected headlines.
Looking ahead, traders are positioning for the Federal Reserve's final policy meeting of the year on December 17, where policymakers will update their Summary of Economic Projections. The release of eurozone PMI data on December 16 will provide another crucial input for ECB watchers. With year-end rebalancing flows already underway, the divergence narrative appears poised to dominate currency markets through the first quarter of 2026.
Disclaimer: This analysis is AI-generated for educational purposes. Traders should verify all information and conduct their own research before making trading decisions.