Fed Dovish Shift and Rate Cut Bets Shape EUR/USD and Global Currency Moves

Thursday’s currency markets revealed a complex interplay of central bank expectations and economic data, with the dollar index (DXY) managing only a +0.05% gain despite mixed signals from Washington and across the Atlantic. The euro’s retreat in EUR/USD trading highlights growing divergence between Fed and ECB policy paths, while dovish sentiment surrounding potential Fed leadership is constraining dollar strength.

EUR/USD Weakens Amid ECB Rate Cut Cycle Conclusion

EUR/USD declined -0.14% on Thursday as the European Central Bank signaled an end to its easing cycle. While the ECB maintained rates as expected and even raised its 2025 Eurozone GDP forecast to 1.4% from 1.2%, officials communicated that the interest rate reduction cycle has likely reached its conclusion. ECB President Lagarde reinforced hawkish positioning by describing the Eurozone economy as “resilient,” and the central bank kept the deposit facility rate steady at 2.00%.

Yet this hawkish messaging proved insufficient to sustain euro gains. Fiscal headwinds from the Eurozone emerged as a significant headwind when Germany announced plans to boost federal debt sales by nearly 20% next year to a record 512 billion euros ($601 billion). This expansion in government borrowing weighed on EUR/USD sentiment and pressured the currency lower, suggesting that fiscal concerns may outweigh the ECB’s relatively hawkish tone. Swap markets are pricing just a 1% probability of a -25 bp ECB rate cut at February’s policy meeting.

Dollar’s Recovery Hindered by Trump Fed Chair Speculation

The dollar’s struggle to extend gains reflects growing market anxiety about monetary policy direction. While US weekly jobless claims fell by -13,000 to 224,000 (near expectations), early weakness from disappointing US economic data initially dragged on the currency. November CPI came in at +2.7% year-over-year versus expectations of +3.1%, with core CPI posting +2.6% compared to forecasts of +3.0%—marking the slowest pace in 4.5 years. The December Philadelphia Fed business outlook survey surprised to the downside, falling -8.5 to -10.2 versus expectations of an increase to 2.3.

What truly pressured the dollar was market chatter surrounding incoming Fed leadership. Reports indicate that President Trump intends to announce his selection for a new Fed Chair in early 2026, with National Economic Council Director Kevin Hassett emerging as the most likely candidate. Markets view Hassett as the most dovish option, which has sparked concern about a more accommodative monetary policy stance ahead. This uncertainty, combined with the Fed’s recent decision to inject $40 billion monthly in T-bill purchases, has significantly undercut dollar demand.

USD/JPY Falls as BOJ Rate Hike Looms

USD/JPY posted a -0.08% decline as the yen gathered support from multiple sources. Lower Treasury note yields bolstered yen appeal, while market expectations for a 25 basis point BOJ rate hike at Friday’s policy meeting provided strong tailwinds. The futures market is pricing a 96% probability of a rate increase at the next BOJ decision.

However, Japanese fiscal concerns provided some restraint on yen strength. Reports that the Japanese government is considering a record budget exceeding 120 trillion yen ($775 billion) for fiscal 2026 tempered enthusiasm for the currency. This massive spending proposal suggests ongoing fiscal pressures despite monetary tightening prospects.

Precious Metals Navigate Mixed Signals From Central Banks

February COMEX gold closed down -9.40 (-0.21%), while March COMEX silver fell -1.682 (-2.51%), as markets digested conflicting support and headwind factors. Stock market strength on Thursday reduced safe-haven demand for precious metals, while bullish central bank rhetoric—including ECB President Lagarde’s “resilient” economy comments and BOE Governor Bailey’s statement that rate cut barriers have risen—weighed on prices. Expectations for BOJ tightening also pressured metals lower.

However, support emerged from the BOE’s 25 bp rate cut, which boosted precious metals’ appeal as a store of value. Additionally, Thursday’s weak US inflation and Philadelphia Fed data suggest a more dovish Fed environment, which historically supports gold and silver prices. Geopolitical uncertainties surrounding Ukraine, the Middle East, Venezuela, and potential US tariff impacts continue to provide safe-haven demand.

Perhaps most significantly, strong central bank accumulation is underpinning the precious metals complex. China’s PBOC gold reserves rose by +30,000 ounces to 74.1 million troy ounces in November, marking the thirteenth consecutive month of reserve expansion. The World Gold Council reported that global central banks purchased 220 MT of gold in Q3, up +28% compared to Q2.

Silver faces its own supply dynamics. Shanghai Futures Exchange warehouse inventories fell to 519,000 kilograms on November 21—a 10-year low—reflecting tight Chinese supply conditions. Following record highs in mid-October, ETF holdings declined from 3-year peaks reached on October 21, though silver ETF long positions rebounded to nearly 3.5-year highs by Tuesday, suggesting renewed fund interest in the precious metal.