The Euro came under some pressure after failing to hold gains, with year-end flows limiting momentum despite a broader medium-term USD bearish backdrop. The key driver remains policy divergence: the ECB is signalling patience and caution, keeping rates at 2% as inflation hovers near target, while markets still expect the Fed to deliver further easing into 2026 despite internal disagreement on timing. Spanish inflation eased slightly in December but remains above the euro-area average, reinforcing expectations that the ECB will stay on hold for longer. Looking ahead, improving eurozone growth, a narrowing US growth advantage, and concerns over US debt and valuations underpin expectations among major banks for EURUSD to rise toward 1.20–1.25 by end-2026.

The yen remains driven more by concerns over Japan’s fiscal stance and policy credibility than by a clear normalization story. While the BOJ continues to debate gradual rate hikes, arguing policy is still below neutral, Japan’s expansionary budget and structural headwinds keep the yen under pressure. Authorities have signaled readiness to intervene if USDJPY breaks above 158, which would significantly raise political pressure, even as markets watch key technical levels around 155. Longer term, views are split: some see gradual BOJ tightening and Fed easing supporting yen appreciation, while many banks still expect persistent yen weakness due to wide yield gaps, negative real rates, capital outflows, and limits on how far the BOJ can raise rates.

The Australian dollar is holding up close to its year-to-date high, supported by resilient commodity demand and expectations that the RBA may shift toward tightening as inflation risks persist. Positive but modest support has come from signs of stabilization in China’s economy, though markets remain cautious given the uneven recovery and limited policy clarity. With the Aussie among the top-performing G10 currencies this quarter, sustained gains since mid-November, strong commodities, improving global risk sentiment, and a softer US dollar backdrop are expected to support further AUD appreciation into 2026.