Forex Outlook: EUR/USD Consolidates as Fed Easing Bets Shape Markets

Market participants currently price in at least two 25-bp rate cuts in 2026, while the Fed’s official projections still point to just one move. In any case, no active steps are expected from the regulator in the first half of 2026. In May, the Fed leadership is set to change as Jerome Powell’s second four-year term expires.

Among potential candidates, analysts highlight White House economic adviser Kevin Hassett, who has criticized Powell for not pivoting more quickly toward a dovish stance. The Fed cut the policy rate to 3.75% in December, while keeping the forward path broadly unchanged and simultaneously upgrading its macro forecasts: inflation expectations were revised lower, while U.S. growth estimates were raised.

Meanwhile, the European Central Bank (ECB) left rates unchanged at its December meeting: the deposit facility rate was maintained at 2.00%, the main refinancing operations rate at 2.15%, and the marginal lending facility rate at 2.40%. The ECB also sounded relatively optimistic about the inflation outlook, expecting it to stabilize around the 2.0% target over the medium term. At the same time, officials continue to point to notable labor-market risks and a broader slowdown in regional business activity, which is being partially supported by the defense sector and Germany’s infrastructure modernization programs.

Today at 17:00 (GMT+2), investors and FX traders will focus on U.S. November pending home sales. Forecasts suggest monthly growth may slow from 1.9% to 1.0%, while the annual figure is expected at –0.4%. At 17:30 (GMT+2), markets will also digest the Dallas Fed manufacturing activity index for December. In November, the indicator fell sharply from –5.0 to –10.4. In the euro area, Spain’s December inflation data will be released tomorrow at 10:00 (GMT+2). Analysts expect inflation to slow from 3.2% to 3.0%, reinforcing the view that the ECB is unlikely to rush toward easing. Moreover, the regulator has noted that borrowing costs could hypothetically be raised if inflation forecasts deteriorate.

GBP/USD

The pound is weakening in GBP/USD, trading near 1.3489 as markets wait for fresh catalysts. Activity remains reduced amid the holiday period, while traders weigh macro data and the outlook for Fed and Bank of England policy at the start of next year. In December, both the Fed and the BoE cut rates by 25 bps to 3.75%, in line with expectations.

The BoE’s decision passed by only a one-vote margin, reflecting still-elevated inflation pressure in the UK. December CPI is running at 3.2% year-on-year — well above the 2.0% target — but it is also the lowest reading in the past eight months. Policymakers expect inflation could ease to 2.1% in 2026. Meanwhile, traders remain concerned about weak UK growth and a rapidly cooling labor market. Data published last week showed GDP rising by 0.1% quarter-on-quarter in Q3 and by 1.3% year-on-year.

U.S. growth, by contrast, came in much stronger than expected: the annual GDP measure accelerated from 3.8% to 4.3% versus a 3.3% forecast. However, robust growth increases the risk that the Fed may move more actively to cut borrowing costs in 2026, especially as Jerome Powell is expected to step down in May. Dollar sentiment last week was also supported by labor data: initial jobless claims for the week ending December 19 fell from 224K to 214K versus a 223K forecast, while continuing claims rose from 1.885M to 1.923M.

AUD/USD

The Australian dollar is strengthening in AUD/USD, extending the prior week’s uptrend that pushed the pair to fresh highs last seen in October 2024. AUD/USD is trading near 0.6708. While overall activity remains light, volatility is elevated as markets debate how Fed policy could evolve next year. Analysts currently expect at least two 25-bp cuts, but only in the second half of the year. Official projections reaffirmed at the December meeting still imply just one adjustment.

Nonetheless, expectations could shift meaningfully after a new Fed chair is appointed in May. The Reserve Bank of Australia (RBA), by contrast, remains relatively firm and is not signaling near-term easing, citing rising inflation risks and persistent uncertainty.

Moreover, officials have not ruled out tighter policy over the medium term if the economic backdrop worsens. That message was reflected in the minutes from the RBA’s December meeting published last Tuesday: the cash rate was kept unchanged at 3.60%, while policymakers signaled the need for a longer period of restrictive borrowing costs amid rising domestic inflation.

Tomorrow at 21:00 (GMT+2), the minutes from the Fed meeting could provide more clarity on the regulator’s next steps. AUD/USD may also be influenced by China’s December activity data in manufacturing and services due on Wednesday at 03:30 (GMT+2). Forecasts suggest the NBS manufacturing PMI will hold at 49.2, while the services index may rise from 49.5 to 49.8.

USD/JPY

The U.S. dollar is weakening in USD/JPY, testing 156.30 to the downside as overall trading activity remains reduced. Today at 17:00 (GMT+2), the focus will again be on U.S. November pending home sales. Forecasts point to monthly growth slowing from 1.9% to 1.0% and the annual reading holding at –0.4%. The yen remains under pressure despite the Bank of Japan raising its policy rate by 25 bps to 0.75%.

In its accompanying statement, officials said tightening should support wage growth and would not lead to a material acceleration in consumer inflation above the 2.0% target. Still, investors did not see strong determination in the tone and interpreted it as a sign that policymakers may not rush to extend a hawkish stance.

This aligns with the position of the government led by Prime Minister Sanae Takaichi. On Friday, investors focused on Tokyo inflation figures: in December, the CPI slowed sharply from 2.7% to 2.0% year-on-year, while core inflation eased from 2.8% to 2.3%.

Additionally, November industrial production data showed a 2.1% year-on-year decline after a 1.6% increase the prior month, while the monthly reading fell by 2.6% after a 1.5% gain, versus a 2.0% forecast. Meanwhile, the Fed cut rates in December, and markets expect additional easing next year. More detail may come from the minutes of the Federal Open Market Committee (FOMC) meeting, due tomorrow at 21:00 (GMT+2).

XAU/USD

XAU/USD is consolidating near record highs, correcting around 4481.04 as markets wait for fresh drivers. Trading activity remains relatively low, but volatility is rising. Demand for gold stays firm as investors and FX traders expect the Fed to maintain a low-rate trajectory in 2026. In December, the Fed cut rates by 25 bps to 3.75% and reaffirmed its easing projections for 2026.

At the same time, growth forecasts were revised higher, while inflation projections pointed to faster disinflation. Officials currently indicate at least one 25-bp cut in 2026, while markets are pricing in two or more.

It is also worth noting that the Fed’s leadership is set to change in May, which could reshape expectations for the central bank’s next steps. Meanwhile, demand for gold is supported by rising geopolitical risks — including the ongoing maritime blockade of Venezuela announced by President Donald Trump as part of efforts to combat drug trafficking.