The U.S. dollar slipped to a multi-week low on Tuesday after fresh comments from Federal Reserve officials boosted expectations of policy easing in early 2026. Major currency pairs reacted sharply, with EUR/USD climbing and USD/JPY retreating from recent highs.
Key Highlights
- Dollar Index (DXY) falls to three-week low near 102.70 as Fed officials hint at accelerated rate-cut path.
- EUR/USD climbs above 1.11 on improved Eurozone PMI data and broad dollar softness.
- USD/JPY retreats below 149 as traders increase bets on additional BOJ tightening.
- Market pricing now implies at least 100 bps of Fed cuts in 2026, according to CME FedWatch data.
- Analysts warn of increased FX volatility if upcoming U.S. jobs data undershoots expectations.
Dollar Index Drops as Fed Signals Softer Stance
The U.S. Dollar Index dipped toward 102.70, marking a three-week low after multiple Federal Reserve policymakers suggested that inflation progress is “sufficiently encouraging” to consider rate reductions earlier than previously anticipated. According to a report from Reuters, Fed Governor Lisa Cook emphasized that slowing labor-market momentum supports a more flexible stance heading into 2026.
This shift prompted traders to reduce bullish dollar positions built during last month’s hot CPI cycle. Analysts at ING noted that the dollar’s downside bias may persist as long as real yields continue sliding.
Euro Strengthens on Resilient Eurozone PMI
The EUR/USD pair rallied above 1.11, buoyed by stronger-than-expected Eurozone PMI data. The services sector showed notable resilience, with Germany and France posting simultaneous expansions for the first time since early 2023. As reported by Bloomberg, several institutional desks upgraded their forecasts for Q1-2026 Eurozone GDP following the release.
The combination of euro-area strength and U.S. dollar weakness created a supportive environment for the currency pair. However, strategists warn that the ECB may continue pushing back against rate-cut expectations, which could temper further upside.
Yen Recovers as BOJ Tightening Bets Rise
USD/JPY fell below 149, reversing part of its recent multi-week rally. Traders increased bets that the Bank of Japan will announce another modest rate hike in early 2026, especially after Governor Ueda highlighted “upside wage risks” in the latest policy briefing. Japanese 10-year yields rose toward 1.06%, further supporting yen strength.
According to Nikkei Asia, several Tokyo-based banks now anticipate at least two BOJ hikes in 2026 as Japan continues to pivot away from decades of ultra-loose monetary policy.
Markets Price in 100 bps of Fed Cuts for 2026
Futures markets repriced aggressively following the Fed commentary, with the CME FedWatch tool showing traders expect at least 100 basis points of cuts next year. The shift reflects softening inflation and slowing consumer demand.
Analysts caution that the market may be overly optimistic, but the repricing has already driven significant adjustments across FX pairs, Treasuries, and precious metals.
Heightened Volatility Risk Ahead of U.S. Jobs Report
FX volatility could spike later this week as the U.S. nonfarm payrolls report approaches. A weaker-than-expected result could amplify rate-cut expectations and deepen the dollar’s decline. A surprise beat, however, may initiate a sharp reversal.
Economists at Goldman Sachs stated that “FX markets remain extremely sensitive to even minor labor-market surprises,” reflecting heightened uncertainty in monetary-policy outlooks.
Bottom Line
Dollar weakness is likely to persist if U.S. economic data continues to soften and the Fed maintains its pivot toward earlier easing. Traders should prepare for elevated volatility across EUR/USD, USD/JPY, and other major pairs as macro data releases and policy commentary steer short-term momentum.