Forex Market Weekly Summary: Yen Exchange Rate Trends Diverge, Multiple Factors Drive Volatility

Last Week Market Overview

Last week (12/15-12/19), the US Dollar Index rose by 0.33%, while non-US currencies showed mixed performance. The euro declined by 0.23%, the Japanese yen depreciated by 1.28%, the Australian dollar fell by 0.65%, and the British pound edged up by 0.03%. Market liquidity remained relatively stable, but the policy directions of major central banks became the key drivers influencing currency movements.

Euro Under Pressure, Fed Rate Cut Expectations as a Variable

Technical and Policy Battle

EUR/USD fluctuated last week, ending with a decline of 0.23%. This trend reflects the market’s reassessment of the Federal Reserve’s policy path. Despite mixed US November non-farm payroll and CPI data, top investment banks like Morgan Stanley and Barclays pointed out that recent data are significantly affected by seasonal adjustments and statistical distortions, making it difficult to accurately reflect the true economic situation.

Rate Cut Expectations Facing Adjustments

Currently, the market still expects two rate cuts by the Fed in 2026, with a 66.5% probability of a cut in April. However, this expectation is being challenged by data quality issues. The European Central Bank (ECB) maintained interest rates as expected, but President Lagarde’s comments lacked the previously anticipated hawkish stance, further weakening the outlook for European easing policies.

Institutional Views Are Optimistic but Wary

Danske Bank believes that, with the Fed leaning towards rate cuts and the ECB maintaining current policies, the real interest rate differential between the US and Europe, after inflation adjustments, may narrow, supporting the euro’s medium-term appreciation. Additionally, the recovery trend in European asset markets, increased hedging demand against the US dollar, and declining confidence in US financial institutions could all serve as factors supporting euro strength.

Recent Focus

This week’s key focus is on the US Q3 GDP revision data. If the data surpass expectations, it will boost the dollar and pressure EUR/USD. Technically, EUR/USD remains above its moving average system, with short-term upside potential. Resistance is near the previous high of 1.18; if the decline continues, support levels are around the 100-day moving average at 1.165.

Yen Exchange Rate Divergence, Policy Intervention Risks Emerge

Central Bank Policy Stance Divergence Widens

Last week, USD/JPY surged by 1.28%, mainly driven by the Bank of Japan’s policy stance. The BOJ raised interest rates by 25 basis points as expected, but Governor Ueda’s tone was dovish, disappointing the market. Meanwhile, Prime Minister Suga’s cabinet approved a fiscal stimulus package worth 18.3 trillion yen, which largely offset the yen’s appreciation pressure from monetary tightening.

Depreciation Pressure Approaching Sensitive Levels

Market expectations are that the BOJ will implement only one rate cut in 2026, with the next rate hike expected around October 2026. Sumitomo Mitsui Banking Corporation estimates that USD/JPY could depreciate to 162 in Q1 2026. However, JPMorgan issued a warning that if the yen depreciates beyond 160 in the short term, it would be considered an abnormal fluctuation, significantly increasing the likelihood of government intervention.

Institutional Divergence Reflects Market Uncertainty

Nomura Securities remains relatively optimistic, believing that with the Fed’s rate cuts, the US dollar will weaken, and the yen will not continue to depreciate. The firm forecasts the yen to appreciate to 155 in Q1 2026. This contrasts sharply with Sumitomo Mitsui’s forecast of 162, highlighting deep market disagreement on the yen’s future trend.

Technical Indicators Show Upward Momentum

USD/JPY has broken above the 21-day moving average, with MACD signaling a buy. If the pair can effectively break through the 158 resistance level, a broader upward space could open. Conversely, if it faces resistance below 158, a correction is more likely, with support around 154.

Recent Monitoring Focus

Investors should closely watch Ueda’s subsequent speeches. If his remarks turn hawkish or if verbal intervention by Japanese authorities escalates, USD/JPY could reverse downward. Under the combined influence of policy and technical factors, short-term volatility in the yen exchange rate is expected to remain high.