The US Dollar Index (DXY), which measures the value of the US Dollar against a basket of six major currencies, exhibits signs of slowing of the upside trend on Friday and this Monday after a 5-day winning streak and upon reaching the round 107 level. This can be attributed to investors taking a wait-and-see position as all optimism about a hawkish Fed has been priced in during the 5-day rally:

Current market sentiment suggests that the Fed will lower its benchmark borrowing rate by 25 bps, bringing it to a range of 4.25% to 4.50%. While the rate cut is largely expected, attention will shift to the Fed’s Summary of Economic Projections, or "dot plot," which provides insight into policymakers’ expectations for future rate movements.

The Euro remains on the back foot against the US Dollar, with EUR/USD hovering around the key psychological level of 1.0500. This development follows a series of dovish statements from ECB officials, including President Christine Lagarde, who emphasized that inflation momentum, particularly in the services sector, has "dropped steeply recently."

The ECB’s Vice President, Luis de Guindos, echoed this stance, supporting a continuation of the current easing path. Last Thursday, the ECB reduced its Deposit Facility Rate by 25 bps to 3%. Given that Eurozone inflation is now seen as under control, policymakers are increasingly focused on mitigating economic risks. Market consensus indicates that an additional 100 bps reduction in key borrowing rates could be implemented by June 2025, further eroding the Euro’s appeal relative to the Dollar.

The overall technical picture of EUR/USD on the daily timeframe indicates that the price remains confined within a range of 1.05 to 1.06, with multiple unsuccessful attempts to break upward or downward since the end of November. A decisive breakout from this range, with the price firmly establishing itself above or below it, is likely to trigger an extended price movement in the direction of the breakout:

Despite these headwinds, recent economic data offered a glimmer of optimism. The preliminary Eurozone HCOB PMI for December showed signs of recovery. Overall business activity improved to 49.5 from 48.3, hinting at a slower contraction. The services sector notably returned to expansion territory, with the Services PMI rising to 51.4 from 49.5. While this uptick is encouraging, it may not be sufficient to shift the ECB’s policy stance in the short term.

The British Pound saw a strong rally against the US Dollar, climbing to 1.2675 during Monday’s North American session. This move came on the heels of stronger-than-expected flash S&P Global UK PMI data:

The PMI for December indicated steady business activity growth at 50.5, with the services sector showing stronger expansion at 51.4, up from 50.8 previously and above market forecasts of 51.0. While the report signals stable growth, survey respondents remain wary about future prospects. Fragile consumer confidence, tighter corporate budgets, and cutbacks in non-essential spending were cited as key concerns.

This week, the GBP/USD pair is poised for heightened volatility, with two critical events on the horizon. First, on Tuesday and Wednesday, the UK’s employment data for the three months ending October and the CPI for November will be released. Both reports have the potential to shift market sentiment. Second, the BoE will hold its final monetary policy meeting of the year on Thursday. While the BoE is widely expected to maintain its key interest rate at 4.75%, market participants will be focused on forward guidance for 2025. Any deviation from the anticipated policy outlook could trigger sharp moves in GBP/USD.