The euro edged up as the dollar softened, with expectations of a stronger euro into 2026 driven by diverging central-bank paths, anticipated Fed rate cuts, and improving Eurozone growth. German inflation data showed faster-than-expected cooling, reinforcing the broader euro-area disinflation trend, though core pressures remain sticky, supporting the ECB’s relatively hawkish stance and resistance to further rate cuts. At the same time, Europe faces mounting political and geopolitical risks—from Germany’s fragile economic outlook and coalition tensions to concerns over US foreign policy moves and unresolved frictions around Ukraine—that add uncertainty to the otherwise improving macro picture.

USDJPY slipped as rising Sino-Japanese geopolitical tensions weighed on sentiment, while slightly weaker-than-expected December PMI data had little market impact. Japanese and U.S. officials remain uneasy about sharp yen weakness beyond 160, with a move above 158 likely to raise the risk of intervention, creating asymmetric risks where upside spikes face policy resistance. Although upcoming wage data are expected to show a temporary slowdown in nominal and real earnings, underlying wage momentum remains solid due to labor shortages and minimum wage hikes, supporting the BOJ’s inflation outlook. Meanwhile, China’s new export restrictions on dual-use items to Japan, though limited for now, add meaningful tail risks of further economic escalation.

The Australian dollar rose about 0.3%, hovering near a 15-month high and marking a fourth straight day of gains after November CPI data showed inflation easing more than expected. While annual inflation slipped to 3.4%, yields stayed elevated and markets continue to price in some chance of near-term RBA rate hikes, though expectations have softened slightly since before the data. In contrast, anticipated ongoing Fed easing through 2026 leaves the RBA’s relatively firmer stance broadly supportive for the AUD against the US Dollar.