Euro pops then fades as ECB’s Schnabel backs hike bets; CAD shines, yen slips ahead of FOMC
The euro briefly jumped after fresh coverage of hawkish ECB commentary but quickly reversed, with traders eyeing US yields and the week’s central-bank risk. CAD stayed bid on Canada’s blowout jobs data, while the yen weakened despite an anticipated BoJ hike, firming the dollar tone into the FOMC.
ECB hawks surface, but euro rally proves short-lived
European FX trade opened quietly before a headline round-up of remarks from ECB Executive Board member Isabel Schnabel reignited rate-hike chatter. Schnabel signaled she’s comfortable with market bets that the next ECB move could be a hike, reinforcing a recent focus on upside inflation risks across major central banks. The initial euro bid faded as traders judged the comments largely known and priced, especially with the year’s final FOMC decision looming.
Elsewhere on the Governing Council, Slovakia’s Peter Kazimir said there is no reason to change rates in the coming months, while Finland’s Olli Rehn emphasized the ECB’s full optionality and freedom of action. The mixed tone underscores a high bar for near-term moves but keeps a hawkish skew on the table for 2026 if inflation surprises on the upside.
Risk appetite contrasts with rising yields
US equity futures pointed higher and bitcoin extended gains, signaling resilient risk appetite. But bond markets told a different story: US Treasury yields continued to grind toward the top of their three-month range. The latest push higher followed a powerful Canadian employment report that stoked global “over-easing” fears, adding a mild tailwind to the dollar and keeping FX volatility anchored as traders hedge into the Fed.
G10 movers: CAD outperforms, JPY lags despite BoJ shift
The Canadian dollar remained the day’s strongest after Friday’s blockbuster jobs data, with carry and growth momentum supporting the move. In contrast, the yen slipped even as markets anticipate a Bank of Japan rate hike. Japan’s Finance Minister Shunichi Katayama flagged “one-sided, rapid moves,” a familiar warning shot that highlights official discomfort with currency weakness but has yet to reverse the trend while global yields stay elevated.
Europe’s data mix: German output beats, confidence weak but improving
- Germany October industrial production jumped +1.8% m/m versus +0.4% expected, hinting at stabilization in Europe’s largest economy.
- Eurozone December Sentix investor confidence improved to -6.2 from expectations of -7.0, still negative but ticking higher.
- Switzerland’s SECO consumer confidence held at -34, matching forecasts.
The data reinforced the notion of a slow European mend but not enough to shift policy expectations meaningfully this year.
What traders are watching
- FOMC: Defensive positioning into the Fed’s final decision of the year, with risks skewed to a firm policy tone given sticky services inflation.
- FX options: Notable expiries around the 10am New York cut may keep majors rangebound intraday.
- Asia handover: RBA commentary is in focus as markets debate whether a more hawkish stance is emerging.
- BoJ watch: Despite an anticipated hike, the path of normalization and official rhetoric will be key for USD/JPY direction.
Market implications
The euro’s pop-and-drop underscores a market primed more for the Fed than fresh ECB rhetoric. Rising US yields remain a headwind to broad dollar weakness, particularly against the yen. CAD strength looks stickier near term given domestic data momentum. For now, risk appetite is holding, but higher yields and thin year-end liquidity raise the odds of sharp range breaks on policy surprises.
FAQ
What exactly did the ECB’s Schnabel signal?
Isabel Schnabel indicated she’s comfortable with market pricing that the ECB’s next move could be a rate hike, reinforcing a focus on upside inflation risks. The remarks align with her hawkish reputation and did not materially reset near-term ECB expectations.
Why did the euro rally fade so quickly?
The comments were largely anticipated, and with the FOMC in view, traders favored cautious positioning. Rising US yields also tempered euro strength, leading to a swift retracement after the initial pop.
Why is the yen weakening despite expectations for a BoJ rate hike?
Even with a potential BoJ move, Japan’s rates remain far below global peers. As US yields drift higher, rate differentials continue to pressure the yen. Official warnings about “one-sided” moves may slow, but rarely reverse, such trends absent a policy surprise.
What’s driving CAD outperformance?
Friday’s stronger-than-expected Canadian jobs report boosted growth and policy expectations, supporting the currency. The data also contributed to a global reassessment of easing prospects, nudging yields higher and aiding CAD on relative growth dynamics.
What should FX traders monitor for the rest of the day?
Watch US yield direction, any pre-Fed rhetoric, and the 10am New York options cut for potential pinning effects. In Asia hours, attention turns to RBA communications and ongoing BoJ signals. As BPayNews notes, year-end liquidity may amplify moves if policy surprises surface.
