EUR/USD Weakness Signals Shift in Eurozone Rate Outlook as Dollar Stabilizes

Mixed Signals in Currency Markets Amid Shifting Central Bank Expectations

Currency markets displayed considerable volatility on Thursday as investors recalibrated their expectations for major central banks. The dollar index (DXY) managed to close with a slight gain of +0.05%, recovering from early-session weakness despite several headwinds that kept overall momentum subdued. This modest resilience came as EUR/USD declined -0.14%, with the euro surrendering earlier advances on the back of revised expectations from European policymakers.

US Economic Data: A Tale of Softer Inflation and Resilient Labor Markets

The dollar’s journey on Thursday began on uncertain footing, pressured by mixed economic indicators from the United States. Initial jobless claims provided some support, falling by 13,000 to reach 224,000, nearly in line with forecasts of 225,000. However, this positive labor market signal was partially offset by softer-than-anticipated inflation readings. November’s Consumer Price Index rose just 2.7% year-over-year, trailing expectations of 3.1%, while the core measure came in at 2.6% versus the projected 3.0%—marking the slowest pace of increase in 4.5 years.

The December Philadelphia Federal Reserve business outlook survey delivered an additional disappointment, contracting unexpectedly to -10.2 from prior levels, falling sharply below consensus expectations for a rise to 2.3. These dovish economic signals created immediate selling pressure on the dollar, as market participants reassessed the likelihood of continued Federal Reserve rate cuts. Currently, markets are pricing in approximately a 27% probability that the FOMC will reduce the federal funds target range by 25 basis points at its January 27-28 meeting.

EUR/USD Struggles as ECB Signals Likely End to Rate-Cut Cycle

The pressure on the euro stemmed largely from a critical shift in European Central Bank messaging. Although the ECB maintained its deposit facility rate at 2.00% as anticipated, Bloomberg’s reporting of ECB officials’ views that the interest rate reduction cycle is likely nearing completion caught markets off-guard. This development weighed heavily on EUR/USD momentum despite the Bank having raised its 2025 Eurozone GDP forecast to 1.4% from the prior estimate of 1.2%.

ECB President Lagarde’s characterization of the Eurozone economy as “resilient” should have supported the single currency, yet fiscal concerns in the region proved to be a stronger countervailing force. Germany’s announcement that it will increase federal debt issuance by roughly 20% to a record 512 billion euros ($601 billion) to finance elevated government spending sparked renewed concerns about Eurozone fiscal sustainability and pressured EUR/USD further. The market is currently discounting only a 1% probability of a 25 basis point ECB rate cut at the February 5 policy meeting.

Yen Strength and Dollar Weakness Amid BOJ Rate Hike Expectations

USD/JPY declined -0.08% on Thursday as the yen appreciated on the back of broader dollar weakness and lower U.S. Treasury note yields. Supporting the yen was widespread market conviction that the Bank of Japan will raise rates by 25 basis points at its Friday policy meeting, with markets pricing an elevated 96% probability of this action. This anticipated tightening contrasts with the softer U.S. economic backdrop and the contemplated appointment of a dovish Federal Reserve Chair by President Trump, who recently indicated his intention to announce his Fed chair selection in early 2026. Bloomberg reporting suggests National Economic Council Director Kevin Hassett remains the most likely candidate, widely viewed by markets as the most accommodative choice.

The yen’s gains were nonetheless contained by mounting Japanese fiscal concerns, following Kyodo’s report that the Japanese government is contemplating a historic budget exceeding 120 trillion yen ($775 billion) for fiscal 2026, which could eventually weigh on the currency’s valuation.

Precious Metals Navigate Safe-Haven Demand Against Rate Hike Headwinds

February COMEX gold futures closed down 9.40 points (-0.21%), while March silver retreated 1.682 points (-2.51%) on Thursday. The precious metals complex faced conflicting forces throughout the session. Stock market strength reduced safe-haven demand, and hawkish commentary from multiple central bank officials—including ECB President Lagarde’s “resilient” economy remarks and Bank of England Governor Bailey’s assertion that the bar for further rate cuts has risen—pressured both metals lower.

BOJ rate hike expectations similarly weighed on precious metals as a tighter Japanese monetary policy generally reduces the appeal of non-yielding assets. Additionally, profit-taking emerged in silver following its explosive three-week rally to record highs on Wednesday, and dollar strength sparked long liquidation in the metal.

However, precious metals found countervailing support from multiple sources. The Bank of England’s 25 basis point rate reduction during the session boosted safe-haven demand, and Thursday’s softer U.S. economic readings—particularly the benign inflation data and disappointing Philadelphia Fed survey—rekindled dovish sentiment regarding Federal Reserve policy. Geopolitical uncertainties surrounding U.S. trade policy, ongoing tensions in Ukraine, Middle East instability, and Venezuelan developments continued to underpin safe-haven bidding.

Central bank demand proved particularly supportive, with China’s PBOC bullion reserves rising 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 accumulated 220 metric tons of gold in Q3, representing a 28% increase from Q2, demonstrating sustained institutional demand at higher price levels.

Silver benefited from supply concerns, as Shanghai Futures Exchange warehoused inventories plummeted to 519,000 kilograms on November 21, the lowest level in a decade. Despite record-high ETF holdings reached in mid-October subsequently declining due to long liquidation pressures, silver fund demand has rebounded sharply, with long holdings in silver ETFs recently climbing to nearly 3.5-year highs by Tuesday.

The Broader Outlook: Monetary Policy Divergence and Market Implications

The interplay between anticipated U.S. monetary easing (should a dovish Fed chair be appointed), expected BOJ tightening, and ECB rate-cut cycle conclusion suggests continued currency volatility ahead. The dollar’s current stabilization represents a temporary equilibrium, vulnerable to shifts in either the inflation trajectory or Federal Reserve policy expectations. EUR/USD weakness, meanwhile, reflects genuine concerns about European fiscal dynamics coinciding with diminished rate-cut expectations, a combination likely to persist through the near term.