Australian dollar leads gains over the US dollar, Japanese yen policy bets face uncertain future【Forex Weekly】

Last Week’s Market Scan

Last week (12/22-12/26), the US Dollar Index declined by 0.67% under pressure, while non-USD currencies generally appreciated. Among them, the Australian Dollar performed the strongest with a rise of 1.63%; the Japanese Yen followed closely with a gain of 0.74%; the British Pound increased by 0.88%; and the Euro rose by 0.52%. This wave of appreciation reflects not only the reality of a weakening dollar but also signals of changing expectations regarding major central bank policies.

1. The Logic Behind the Australian Dollar’s Lead

The Australian Dollar rose 1.63% last week, leading among major non-USD currencies. This increase not only reflects the overall weakness of the dollar but also signifies a market re-pricing of risk assets.

Market liquidity was relatively weak during the Christmas holiday, but risk appetite improved. In this environment, the AUD, as a typical risk-sensitive currency, naturally attracted attention. Looking ahead, the TWD, as an emerging Asian currency, is also expected to follow the AUD’s upward trend, with narrowing interest rate differentials between the two and the US dollar supporting this trajectory.

On the technical side, the AUD maintains an upward trajectory with strong short-term momentum. Traders should focus on US economic data this week; if employment or PMI figures show weakness, the AUD’s rally may continue.

2. Euro Retreats from Highs, Fed Rate Cut Expectations Are Key

Last week, EUR/USD briefly surged to 1.1808, a three-month high, before closing up 0.52%. The US Q3 GDP growth rate reached 4.3%, well above expectations, but concerns about the US labor market remain, keeping rate cut expectations high.

According to CME FedWatch data, the market prices in a 62.9% chance of the Fed cutting rates in April next year, with two rate cuts expected in 2026. This suggests that the US and European interest rate differentials will narrow in the first half of 2026.

Morgan Stanley’s latest outlook indicates that EUR/USD could rise to 1.23 in the first half of 2026 amid Fed rate cuts, with a bullish scenario possibly pushing it to 1.30. However, in the second half, due to signs of economic softening in Europe and resilient US economy, EUR/USD is expected to fall back to around 1.16 by year-end.

This week’s focus will be on the Fed meeting minutes and US and European December PMI data. If rate cut expectations intensify, the euro will benefit; otherwise, it may face downward pressure.

Technically, the 1.18 level is a key resistance. If broken this week, downside risks increase, with the next support near the 21-day moving average at 1.17; if the price convincingly breaks above 1.18, resistance extends to 1.186.

3. Yen Intervention Risks Persist; Structural Depreciation Difficult to Reverse

Last week, USD/JPY fell 0.74%, mainly due to a combination of dollar weakness and rising expectations of Japanese government intervention.

On December 22, Japanese Finance Minister Shunichi Suzuki explicitly made hawkish comments, stating that recent yen fluctuations are not based on fundamentals, showing clear speculative features, and implying that Japanese authorities retain full discretion to take decisive action. Following these remarks, market expectations of official intervention increased, providing short-term support to the yen.

However, major institutions like JPMorgan and BNP Paribas generally believe that without aggressive monetary policy support, purely foreign exchange interventions are unlikely to fundamentally reverse the structural depreciation trend of the yen. Overnight index swap data indicates the market expects the Bank of Japan’s next rate hike to occur in the second half of 2026. Driven by the high US-Japan interest rate differential and negative real rates, the probability of USD/JPY breaking through 160 in 2026 is quite high.

In other words, government intervention may temporarily slow the depreciation, but a fundamental change requires monetary policy adjustments. Traders should focus on US economic data and Japanese officials’ tone changes this week. Due to ongoing intervention risks, upside potential for USD/JPY may be limited.

On the technical side, USD/JPY is currently above the 21-day moving average. If it falls below this line, the next support is near the previous low at 154.3; if it remains above, a consolidation and upward move toward resistance at 158 is possible.

Outlook for This Week

Due to Christmas and New Year holidays, market liquidity is expected to be relatively weak this week, but risk appetite has increased. Risk currencies like the AUD and TWD may continue their upward trend, while the US dollar’s performance will be differentiated supported by Fed policy expectations. Key data include the Fed meeting minutes, US and European PMI, and US employment reports. Any unexpectedly strong economic data could redefine the logic behind currency pair movements.