Central Bank Moves Signal Divergence: Dollar Weakens While Euro Eyes Tighter Monetary Stance

Thursday’s trading session painted a mixed picture across major currency pairs, with the dollar index (DXY00) posting a modest +0.05% gain despite underlying pressures that kept it from rallying more decisively. The EUR/USD pair declined by -0.14%, reflecting a notable shift in market sentiment regarding the divergent paths of US and Eurozone monetary policy—a trend that traders monitoring the dollar naar euro cross should closely watch.

Why the Dollar Stumbled Despite Early Gains

The greenback’s recovery was telling more by what didn’t happen than what did. US jobless claims fell by 13,000 to 224,000, landing near expectations of 225,000—a data point that should have supported dollar strength. However, this was overshadowed by softer-than-anticipated inflation readings that sent conflicting signals to markets.

November’s CPI came in at +2.7% year-over-year, well below the expected +3.1%, while core CPI held at +2.6% year-over-year versus the anticipated +3.0%—marking the weakest pace in 4.5 years. The December Philadelphia Fed business outlook survey unexpectedly deteriorated to -10.2 from expectations of a +2.3 improvement. These dovish economic signals triggered market expectations of extended Federal Reserve accommodation, with traders now pricing in a 27% probability of a 25 basis point rate cut at the January 27-28 FOMC meeting.

A secondary headwind emerged from speculation surrounding the incoming administration’s Fed Chair selection. Reports suggest that National Economic Council Director Kevin Hassett is the frontrunner, widely regarded as the most dovish candidate in consideration. This possibility has weighed on dollar sentiment, as markets fear an extended period of accommodative monetary policy ahead.

The Euro’s Complexity: Recovery Then Reversal

The euro initially advanced following the ECB’s expected decision to keep the deposit facility rate at 2.00%. The central bank also raised its 2025 Eurozone GDP forecast to 1.4% from 1.2%, with ECB President Lagarde emphasizing that the economy has remained “resilient.” However, this hawkish messaging proved fleeting.

Subsequent reports from Bloomberg revealed that ECB officials now expect the interest rate cutting cycle to be nearing completion, contingent on current growth and inflation outlooks. More pressingly, fiscal concerns in the Eurozone weighed heavily on sentiment after Germany announced plans to increase federal debt sales by nearly 20% to a record 512 billion euros ($601 billion) to fund enhanced government spending. The dollar naar euro dynamic thus reflects not just monetary divergence but also structural fiscal challenges in Europe that limit the euro’s upside potential.

Swaps currently price in only a 1% probability of a -25 basis point ECB rate cut at the February 5 policy meeting, suggesting markets view the rate-cutting regime as largely concluded.

Yen Gains Traction Amid Rate Hike Expectations

USD/JPY retreated by -0.08%, with the yen strengthening as markets awaited Friday’s Bank of Japan policy meeting. Market pricing shows a 96% probability of a 25 basis point BOJ rate hike, which would represent a hawkish shift relative to the dovish posturing from the Federal Reserve and ECB.

The yen received additional support from declining US Treasury note yields throughout the session. However, fiscal headwinds in Japan—including government consideration of a record 120 trillion yen budget for fiscal 2026—continue to limit the yen’s upside and reflect similar structural challenges facing developed economies globally.

Precious Metals Caught Between Conflicting Forces

February COMEX gold declined 9.40 points (-0.21%), while March COMEX silver dropped 1.682 points (-2.51%), caught between bullish and bearish crosscurrents.

Safe-haven demand faced headwinds as equity markets rallied on Thursday, reducing the appeal of precious metals as alternative stores of value. Additionally, hawkish rhetoric from ECB President Lagarde and Bank of England Governor Bailey suggested that global central banks are reassessing the pace of monetary easing, a factor that typically pressures precious metals.

Yet support emerged from multiple directions. The BOE’s 25 basis point rate cut reinforced precious metals’ safe-haven appeal, while weaker US inflation readings raised questions about whether the Federal Reserve might maintain its accommodative trajectory through 2026. Geopolitical uncertainties spanning Ukraine, the Middle East, Venezuela, and concerns over US tariff policy continue providing safe-haven bid under precious metals.

Central bank demand has proven remarkably resilient. China’s PBOC increased gold reserves by 30,000 ounces to 74.1 million troy ounces in November—the thirteenth consecutive month of accumulation. Meanwhile, global central banks purchased 220 metric tons of gold in Q3, up 28% from Q2 activity.

Silver benefits from supply-side tightness, as Shanghai Futures Exchange warehouse inventories fell to 519,000 kilograms on November 21, the lowest level in a decade. After reaching record highs in mid-October, long liquidation pressures have weighed on prices, though silver ETF holdings recently rebounded to a nearly 3.5-year high on Tuesday, suggesting renewed fund interest in the metal.

The convergence of monetary policy divergence—reflected in the dollar naar euro cross—alongside central bank accumulation and safe-haven positioning will likely remain key drivers for precious metals in the near term.