The Eurozone’s Harmonised Index of Consumer Prices (CPI) for November rose by 2.1% compared to last year, slightly less than the anticipated 2.2%. This data suggests stable inflation expectations in the Eurozone, which influenced currency movements, causing the EUR/GBP pair to rise in response to weak UK CPI data. The USD/CAD pair went down slightly due to typical year-end trends for the Canadian dollar. Meanwhile, the gold market maintained an optimistic outlook. The Federal Reserve’s careful stance on interest rate cuts is helping to create a steady monetary policy environment across major economies.

Currency Movements and Market Reactions

The GBP/USD currency pair dropped below 1.3350 after UK inflation data fell short of expectations. Both headline and core CPI increased by 3.2%. Gold remained strong, holding daily gains above $4,300 despite the stronger USD. Bitcoin, however, faced potential correction risks, trading below $87,000 as ETF outflows rose. Three major central banks—the Federal Reserve, Bank of England (BoE), and European Central Bank (ECB)—are adopting cautious monetary policies. At the same time, Aave (AAVE) continued to decrease, trading below $186 because of bearish signals, even though the SEC wrapped up its investigation into the cryptocurrency. The Eurozone’s inflation rate in November at 2.1% indicates that price pressures are easing quicker than expected. This trend aligns with the cooling we’ve observed since late 2025, with Eurostat’s flash estimate for December predicting a further decline to 2.0%. This development brings the ECB’s 2% inflation target within reach. With this information in mind, we should consider derivative strategies that take advantage of a weaker euro compared to a relatively strong US dollar. The EUR/USD pair is currently struggling near 1.1700. Buying put options with January 2026 expirations could effectively position us for further decline. Selling out-of-the-money call spreads could also express a bearish outlook while generating premium income.

Central Bank Policy Divergence

This scenario highlights a clear divide in central bank policies, which significantly influences the market. The soft inflation data from the Eurozone and the UK suggests that their central banks may lean towards more dovish policies. In contrast, Fed Governor Waller has stated that there is no urgency to cut rates in the US, indicating that the ECB may need to act before the Fed in the upcoming year. We observed a similar policy divergence in 2022 and 2023, which led to a prolonged period of dollar strength. This historical trend could continue, especially with year-end positioning favoring the dollar. The market increasingly expects an ECB rate cut in the first quarter of 2026, while Fed funds futures indicate no immediate changes. With crucial central bank meetings from the ECB and Bank of England taking place this week, short-term volatility is likely to rise as we approach the holidays. Currency volatility, represented by the Euro FX VIX (EVZ), has already increased to 7.8 this week, up from a November average of 6.5. Traders might use options to prepare for this expected volatility surrounding the policy announcements. Create your live VT Markets account and start trading now.

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