Policy Expectations Support FX (12.30.2025)

Global markets saw holiday volatility as the euro held near $1.18 on ECB-Fed policy divergence and the pound hit a three-month high above $1.35 against a weaker dollar. 

The euro held just below 1.18 during thin holiday trading, supported by a widening policy gap between a steady ECB and rising expectations for lower US rates next year. The yen recovered on speculation of further BOJ tightening and possible intervention, while gold stabilized after a sharp profit-driven correction despite ongoing geopolitical risks. Sterling climbed to a three-month high on dollar weakness, and silver rebounded after a steep selloff as safe-haven demand returned.

Euro Approaches Year-End Near Recent Highs

The euro held just under $1.18 in a quiet holiday week, remaining near its highest mark since late September and eyeing a 14.7% surge for 2025. This strength stems from a split between central banks: the ECB maintained rates in December with an outlook of staying on hold, despite President Lagarde noting high future uncertainty. Meanwhile, expectations that Donald Trump will appoint a new Fed chair in May to replace Jerome Powell have fueled bets on lower US rates.

Technically, 1.1720 is the key support, while resistance is seen at 1.1800.

Yen Recovers Amid Rate Hike Speculation

The Japanese yen rose past 156.2 per dollar on Tuesday, reversing some recent losses as investors weighed future rate hikes and potential government intervention during quiet year-end trading. Bank of Japan meeting minutes revealed that officials are still considering further tightening, even after raising rates to a multi-decade high last month. Policymakers argued that interest rates remain too low to be considered neutral, advocating for steady increases to proactively manage inflation risks and normalize monetary policy.

Technically, resistance stands near 156.50, while support is firm at 155.40.

Gold Stabilizes Following Sharp Correction

Gold settled above $4,360 on Tuesday after a 4% plunge triggered by profit-taking. Monday’s sell-off was the metal's steepest one-day decline since October, occurring just after it reached record highs. However, safe-haven demand remains firm due to persistent global tensions. Doubts have resurfaced regarding Russia–Ukraine peace talks following reports that Vladimir Putin may rethink Moscow’s position after alleged Ukrainian drone strikes targeted his residence, causing a fresh rift in negotiations with Donald Trump.

Gold sees support near $4300, while resistance is around $4390.

Sterling Reaches Three-Month Peak

The British pound rose above $1.35, hitting a three-month high as a weaker US dollar narrowed its yield advantage. Markets now expect at least two Federal Reserve rate cuts in 2026. Meanwhile, the Bank of England lowered its rate to 3.75% in December via a tight 5–4 vote. Despite inflation slowing to 3.2% in November, it remains above the 2% target. Governor Andrew Bailey suggested that while rates will fall, the pace will likely be slower than investors anticipate.

From a technical view, support stands near 1.3450, with resistance around 1.3540.

Silver Rebounds Following Sharp Decline

Silver rose over 1% toward $73 per ounce on Tuesday, recovering from an 8% plunge, its steepest daily drop in five years. That selloff resulted from heavy profit-taking intensified by low holiday trading volumes. However, fresh geopolitical friction has renewed safe-haven demand; tensions flared between Russia and Ukraine, while China’s extended military drills near Taiwan encouraged investors to return to precious metals.

From a technical view, resistance stands near $74.90 while support is located around $70.70.