Christmas week turned out to be the worst for the US dollar since June. Falling Treasury yields and new S&P 500 records caused the USD index to retreat. The chances of the Fed easing monetary policy in March rose above 50% again, and there is active discussion in Forex about the new Fed chair. Historically, central bank chiefs have had a significant influence on the FOMC. Donald Trump’s man could bring down interest rates and the greenback.
However, the Fed is not a one-man show. Decisions are made collectively based on incoming data. The longer the pause in the monetary expansion cycle lasts, the higher the chances of a correction in the EURUSD to an upward trend. In this case, the yield differential between US and German bonds will remain wide. Money will flow from Europe to the United States, strengthening the dollar.
In the medium term, monetary policy divergence and a narrowing gap in GDP growth could play in favour of the euro. Financial Times experts expect the eurozone economy to expand by 1.2% in 2026 and 1.4% in 2027. In 2025, it will grow by 1.4%, significantly more than the 0.9% forecast at the end of 2024. Faster economic growth in the currency bloc has been one of the key drivers of the EURUSD’s 13.5% rally this year.
Another trump card for the euro has been the divergence in monetary policy. Financial Times experts believe that the ECB’s deposit rate will remain at 2% until the end of 2026 and rise to 2.25% in 2027. The futures market expects two acts of monetary expansion from the Fed next year. The narrowing of the spread between US and German bond yields is a strong argument in favour of maintaining the upward trend in EURUSD.
Meanwhile, the number of yen bears is growing after the Bank of Japan failed to bring about a serious correction in USDJPY by raising the overnight rate in December. BNP Paribas forecasts the pair to rise to 160 by the end of 2026, while JP Morgan forecasts 164.
The strengthening of the greenback has caused gold to retreat from record highs. The precious metal is heading for its best annual performance since 1979. Since the beginning of the year, it has risen by more than 70%, partly due to capital inflows into ETFs. The reserves of the largest specialised exchange-traded fund, SPDR Gold Shares, have increased by more than 20%.
