After the euro’s best month since 2010, Fx traders expecting a traditional year-end rally may be disappointed. The euro soared last month as bets that the Federal Reserve would decelerate its rate hiking pace weakened the dollar and investors speculated China would reopen its Zero-Covid-policy constrained economy. Some data suggesting the pace of the euro area’s downturn has slowed also raised hopes that a widely expected recession may turn out to be less severe than initially feared.

Seasonal currency trends are often dismissed as mere coincidence, although the argument for time-specific flows is more plausible for December. It’s when investors wind up positions as liquidity evaporates going into the holiday season, while European end-of-year shareholders and tax reporting requirements can trigger repatriation currency inflows.

The euro has rallied in 15 of the 23 Decembers since its inception. That propels an average rally of 1.5% – more than double the next-best month. The historical performance may have partly been a consequence of Europe’s protracted negative interest rates. There would be capital outflows from Europe as investors sought higher-yielding assets elsewhere, only for those flows to return home over year-end reporting periods. But now, markets are grappling with a modifying take on inflation and whether higher interest rates are really that much effective in fighting it. This year will be interesting for two reasons: dollar strength has already been trimmed throughout November following October’s CPI release, and the ECB has exited negative rates.

Retrospectively, the euro tends to gain against the dollar in December, and there are a number of cyclical reasons for that. But after a surge of more than 5% in November, the further uptick may be significantly higher. That’s even before investors consider an array of decisive macroeconomic reports for the region as it braces for a potential energy system crisis this winter. Consider some major central bank meetings as well, and euro bulls have a lot of risks to digest. Given the proximity of key central bank meetings in the middle of the month, when liquidity will be devolving eyeing the approach of the year-end, a correction in the euro is still a realistic risk.

Risks could really return mid-month, when the European Central Bank and the Federal Reserve are both expected to slow the pace of interest rate rises. If the Fed decides to adjust its rhetoric in the wake of upside inflation risks, it could prompt investors to return to the dollar. Further clues on inflationary pressures may come from this week’s data on U.S. producer prices, jobless claims and sentiment. The weekend ahead will see the ECB President Christine Lagarde holding several public speeches and will likely see much of the same motives around fighting inflation whilst leaving a third consecutive 75 bps interest rate hike as an option. Currently, money markets are pricing on average a slightly over 50 bps increment for the December meeting.

From a technical standpoint, in the base case scenario, the euro may be expected to surge to $1.08 in mid-December before $1.10 is hit by end-January. Seasonality trends must be taken with a grain of salt, eyeing energy price risks as the main wild impact on an otherwise clear and straightforward forecast. The fundamentals for a sustained correction of the U.S. dollar are not yet really in place.

Currency moves in either direction could also be exacerbated as liquidity bottleneck ahead of the year-end holidays loom.