The euro is consolidating near recent highs as ECB messaging and staff forecasts signal a neutral policy stance, with rates likely on hold through 2026, keeping policy divergence with the Fed supportive for EUR on dips. Major banks now see scope for a stronger euro in 2026 as euro-area data improve and Fed easing weakens the dollar, even if volatility persists near term. ECB projections show growth around potential and inflation near target, reinforcing the view that policy is in a “good place,” while positioning data show long EUR exposure but not at extreme levels. Near-term focus turns to upcoming euro-area manufacturing, inflation, and Swiss leading indicator data.

The yen edged slightly higher against the dollar as markets stayed alert to possible government intervention, especially with officials signaling readiness to act if depreciation becomes excessive. Softer-than-expected December inflation data in Tokyo support a slower pace of BOJ rate hikes, even as underlying price pressures like rising rents keep gradual policy normalization on the table. While a move above 158 in USDJPY would likely increase intervention risk and near-term downside for the pair—particularly if BOJ tightening coincides with Fed easing—many banks still expect the yen to remain structurally weak into 2026 due to wide yield differentials, negative real rates, and persistent capital outflows.

The Australian dollar has extended its run to another new year-to-date high, supported by growing expectations that the RBA may shift toward a tightening cycle by mid-2026 as consumer spending and wage growth fuel inflation pressures. Many bank analysts expect the run to continue, helped by seasonal strength and improving global conditions, though weaker Chinese industrial profits could limit near-term gains. Any pullbacks are likely to attract buyers amid positive global risk sentiment and hopes of increased Chinese fiscal support in 2026, while Australia’s data calendar remains light this week.