The Federal Reserve's rate cut expectations weaken, and the yen faces increased depreciation pressure!

Forex Market Weekly Summary

Last week (12/15-12/19), the US Dollar Index edged up by 0.33%, with major non-USD currencies showing divergent performances. The Japanese Yen was the biggest loser, falling 1.28% over the week, while the Euro declined 0.23%, the Australian Dollar fell 0.65%, and the British Pound slightly rose by 0.03%. Behind this volatility, the market’s main focus is on the divergence in Federal Reserve policy outlooks and central bank stances worldwide.

Fed Rate Cut Pace Changes, Euro May Have Opportunities

Last week, EUR/USD initially rose then fell, ultimately closing down 0.23%, but the other side of the story is worth noting.

The European Central Bank (ECB) held steady as expected, maintaining its policy rate. However, President Lagarde’s tone was less hawkish than market expectations, appearing relatively moderate. US economic data was mixed—November non-farm payrolls were average, and CPI readings during the same period were below market forecasts. Major investment banks like Morgan Stanley and Barclays issued warnings, suggesting these data might be heavily influenced by technical factors and statistical noise, insufficient to reflect underlying economic trends.

The current market consensus is that the Fed will cut rates twice by 2026, with about a 66.5% probability of a rate cut in April. However, whether this expectation can be maintained depends on upcoming data.

Institutions like Danske Bank see potential upside for the euro. Their logic is clear: the Fed is expected to cut rates in the future, while the ECB will keep rates unchanged for now, narrowing the real interest rate differential between the US and Europe, which could support the euro. Additionally, as European asset markets gradually recover, the demand for USD hedging increases, and investor confidence in US institutions wanes—all factors that could lift the euro.

Key Focus This Week: US Q3 GDP data will be crucial. If the data exceeds expectations, it will be bullish for the dollar and bearish for EUR/USD; if not, it could support the euro. On the technical side, EUR/USD remains above multiple moving averages, with short-term upside potential toward the previous high around 1.18. If it pulls back, watch for support at the 100-day moving average near 1.165.

Yen Depreciation Accelerates, Government Intervention Imminent

The real “bomb” is in the Yen. Last week, USD/JPY rose by 1.28%, with the Yen continuing to depreciate, approaching the 158 level, driven by two main factors.

First is the Bank of Japan’s “dovish rate hike”—the central bank raised rates by 25 basis points as expected, but Governor Ueda’s tone was relatively soft, disappointing the market. Making matters worse, Japan’s cabinet approved a massive fiscal stimulus plan worth 18.3 trillion yen, effectively offsetting the tightening from rate hikes with fiscal expansion, leading to a loosening of policy stance. The market currently expects the BOJ to cut rates only once by 2026, with the next hike not until October 2026.

SMBC predicts the most pessimistic scenario: due to the prolonged rate hike cycle, the Yen could weaken to 162 against the dollar in Q1 2026, and face similar depreciation pressure against the RMB.

JPMorgan has issued a warning: if USD/JPY breaks above 160 in the short term, it will be classified as a “sharp exchange rate movement,” significantly increasing the likelihood of government intervention. In other words, the 158-160 range has become a “red line” for the government.

In contrast, Nomura Securities holds a more optimistic view. They believe that under the continued rate cuts by the Fed, the dollar will eventually weaken, and the Yen will not sustain a downward trend. They forecast USD/JPY to rise to around 155 in Q1 2026.

Focus This Week: Whether Governor Ueda will change tone to a more hawkish stance, and whether Japanese authorities will escalate verbal intervention. If either occurs, USD/JPY could decline. On the technical side, the exchange rate has broken above the 21-day moving average, and MACD shows a buy signal. If it can break resistance at 158, further upside may open; if it remains under pressure below 158, the risk of a pullback increases, with support at 154.

In the context of Yen depreciation and dollar appreciation, the USD/RMB trend is also worth close monitoring, as it relates to cross-border arbitrage and regional capital flows.