The upcoming week brings central bank decisions, and the Japanese Yen and Euro exchange rates face a critical test

This Week’s Market Highlights

In the previous trading week (December 8 to 12), the forex market experienced significant volatility. The US dollar index declined by 0.60%, with mixed performances among major currencies. The euro appreciated by 0.84%, the Japanese yen fell by 0.29%, the British pound rose by 0.34%, and the Australian dollar increased slightly by 0.18%.

Federal Reserve Policy Shift Supports Euro Exchange Rate

The EUR/USD surged by 0.84% last week, driven by weakening signals from the Federal Reserve. The Fed cut interest rates by 25 basis points as expected and announced the launch of the Reserve Management Purchase (RMP) program, purchasing $40 billion worth of short-term government bonds each month. Market participants interpret this as a prelude to a new round of quantitative easing. Coupled with dovish comments from Chair Powell, the US dollar came under pressure and declined sharply for two consecutive days.

It is noteworthy that the latest dot plot indicates the Fed may only cut interest rates once in 2026, yet market traders still expect two rate cuts next year. This divergence in expectations will continue to support the euro exchange rate.

European Central Bank Decision Will Be a Decisive Factor for the Euro

On December 18, the European Central Bank (ECB) will announce its interest rate decision. The market widely expects no change in policy. Focus will be on President Lagarde’s policy statement, especially hints about the future monetary policy direction. Morgan Stanley forecasts that amid ongoing policy divergence between the US and Europe, the EUR/USD could break above 1.23 in the first quarter of 2026, maintaining a bullish outlook for the euro.

This week, attention should also be paid to the US November non-farm payrolls data. If the data underperform expectations, it will further weaken the dollar and push EUR/USD higher; conversely, strong data may lead to short-term adjustments in the euro exchange rate.

Technical Outlook

From a technical perspective, EUR/USD has broken above the 100-day moving average. Both RSI and MACD indicate that bullish momentum remains strong. The near-term upside target is around 1.18; a successful break could challenge the previous high of 1.192. If it pulls back, support levels are seen near the 100-day moving average at around 1.164.

Bank of Japan Rate Hike Expectations Fully Priced In, Yen Faces Directional Challenges

Last week, USD/JPY rose by 0.29%, with the market cautiously observing the Bank of Japan’s rate hike path.

On December 19, the BOJ will announce its latest interest rate decision. The market widely expects a 25 basis point increase to 0.75%, reaching the highest level in 30 years. Since the rate hike expectation is already fully priced in, traders are focusing on BOJ Governor Ueda Kazuo’s comments on the pace of future hikes, especially his views on the “neutral interest rate” level.

Nomura Securities analysts believe Ueda may deliberately keep his statements vague to maintain policy flexibility. The likelihood of the upcoming meeting signaling a more hawkish stance than market expectations is relatively low. US banks suggest that if the BOJ adopts a “mild rate hike” stance, USD/JPY will remain high and could further test 160 early next year. If a “strong rate hike” signal appears, it could trigger yen short covering, pushing USD/JPY toward 150, though this scenario is less likely.

Technical Observation

On the technical side, USD/JPY has broken below the 21-day moving average. Continued pressure below this level could intensify the downtrend, with key support at around 153. Conversely, if it reclaims the 21-day moving average, resistance is seen near 158.

Trading Strategy Recommendations

This week’s trading focus is on the dual central bank meetings and US employment data. The policies of the Bank of Japan and the European Central Bank, combined with the US labor market performance, will determine the short-term direction of the yen and euro exchange rates. It is recommended to closely monitor the language and tone of central bank officials for clues about future policy adjustments.