The United States dollar index (DXY) declined 0.7% last week, hovering at multi-month lows of 98.05 as markets continued to price in a more accommodative Federal Reserve policy outlook for 2026.
Holiday-thinned trading conditions kept moves relatively contained, but sentiment remained tilted against the Greenback amid expectations of two U.S. rate cuts next year.
Despite a rebound in U.S. Treasury yields, the DXY struggled to attract sustained demand. The 2-year and 10-year yields rose back towards 3.53% and 4.16% respectively, although markets continued to judge that stronger economic data would not prevent policy easing further out.
U.S. economic releases were also mixed for the dollar. Preliminary data showed annualised gross domestic product (GDP) growth of 4.3% in the July–September quarter, well above expectations and the previous quarter’s 3.8% expansion, while the core PCE price index rose 2.9% quarter-on-quarter, in line with forecasts.
However, commentary from the White House added to pressure on the currency. White House adviser Kevin Hassett said the Fed was cutting rates too slowly despite the stronger-than-expected growth outcome, according to CNBC.
Fed Governor Stephen Miran also warned that failing to ease policy could raise recession risks over time.
Euro holds firm below 1.1800
The EUR/USD currency pair traded in a narrow range below 1.1800, holding close to its highest level since late September as low liquidity and diverging policy expectations supported the single currency.
The pair finished the week modestly higher, up 0.5% to 1.177 after consolidating recent gains, with trading conditions remaining thin during the Christmas period.
On the policy front, the European Central Bank (ECB) left rates unchanged at its most recent meeting, with President Christine Lagarde signalling flexibility but no urgency to ease.
Money markets currently see only a limited chance of an ECB rate cut in early 2026, helping to underpin EUR/USD around current levels.
Aussie posts fresh yearly high above 0.6700
The Australian dollar outperformed its peers, pushing the AUD/USD pair 1.6% higher to a fresh yearly high near 0.6717 last week.
The move was driven by growing expectations that the Reserve Bank of Australia (RBA) could tighten policy in 2026 if inflation risks continue to build.
Minutes from the RBA’s December meeting revealed that officials discussed the possibility of raising interest rates next year, noting that recent data pointed to upside risks to inflation.
Market pricing now suggests a rising probability of a rate hike by mid-2026, lending support to the Aussie.
Sterling lifts despite BoE caution, soft dollar
The GBP/USD currency pair added 0.9% last week amid subdued holiday trading, remaining well supported just below the 1.35 area after recently touching its strongest level since September.
Reduced liquidity allowed the U.S. dollar to find modest short-term support, though the broader bias remained negative.
Sterling continued to draw support from the Bank of England’s cautious policy stance.
UK officials have pushed back against expectations of aggressive rate cuts, with forecasts suggesting a gradual easing path in 2026 as services inflation and wage growth remain elevated.
Yen regains ground as BoJ outlook firms
The USD/JPY currency pair extended its pullback, trading near 155.80 and giving up all gains made following the Bank of Japan’s recent policy announcement.
The pair has fallen for three consecutive sessions after failing to sustain moves above an almost 11-month high near 158.00.
The Yen strengthened as investors reassessed the outlook for further BoJ tightening following last week’s 25-basis-point rate increase.
While initial guidance was limited, growing speculation about additional hikes and verbal intervention from Japanese officials supported the currency.
Looking ahead, attention will turn to Tokyo CPI data for December, with core inflation expected to slow slightly to 2.5% from 2.8%.
Economic Calendar Week Ahead
On Monday, markets will digest Japan’s Bank of Japan summary of opinions for further insight into policymakers’ thinking.
Tuesday brings a heavy U.S. data slate, including goods trade balance figures, retail and wholesale inventories, pending home sales and the Dallas Fed manufacturing index, alongside South Korean business confidence, industrial production and retail sales data.
Wednesday will see the release of the US Redbook index, house price data, the S&P/Case-Shiller Home Price Index, Chicago PMI and the latest FOMC minutes, while South Korea publishes inflation figures and China releases official and Caixin manufacturing PMI surveys.
Thursday is a New Year’s Day public holiday in many markets, although the U.S. will still report initial jobless claims and South Korea will publish trade data.
Friday’s focus shifts to Australia’s dwelling prices and S&P Global manufacturing PMI, UK Nationwide house prices, and Eurozone HCOB manufacturing PMI figures.
Over the weekend, Canada and the U.S. will release S&P Global manufacturing PMI data, while the Federal Reserve’s balance sheet update will also be in focus.
