FOMC decision imminent, can the euro and yen break through? [Forex Perspective]

This Week’s Key Highlights

The Federal Reserve meeting on December 10th is approaching, serving as a catalyst for significant volatility in the foreign exchange market. According to CME FedWatch Tool data, the market’s probability of a 25 bps rate cut by the Federal Reserve has reached 87.2%, putting noticeable pressure on the US dollar.

Last week’s data already sent signals: US November ADP employment data unexpectedly declined, decreasing by 32,000 jobs, the largest drop since March 2023. Meanwhile, the September PCE Price Index showed a moderation in inflation acceleration, further reinforcing market expectations for a rate cut.

The key question is: beyond the magnitude of the rate cut, the Federal Reserve’s attitude towards the future rate path is what the market truly focuses on.

Can the Euro Bounce Back? How Should Investors View It?

Last week, EUR/USD rose by 0.36%, while the US dollar index fell by 0.50%. The logic behind this trend is clear — expectations of rate cuts pressure the dollar, giving the euro a breather.

However, to determine whether the euro is worth buying, the key lies in the wording of the Federal Reserve’s December dot plot:

If the dot plot shows more than two rate cuts by 2026, or if it announces bond purchase plans that exceed market expectations, this will be seen as a dovish signal, further weakening the dollar and supporting a continued rally in EUR/USD. In such cases, the euro becomes attractive.

Conversely, if the dot plot hints at only one rate cut in 2026, coupled with Jerome Powell’s hawkish tone, the market will reassess the dollar’s relative strength, and EUR/USD may face downward pressure.

On the technical side, EUR/USD has broken above the 100-day moving average, with RSI continuing upward, indicating strong bullish momentum. The next targets are 1.18 and the previous high of 1.1918; if it pulls back after a rally, support levels are at the 21-day moving average of 1.1593 and the previous low of 1.1491.

Yen Appreciation Expectations Surge, but Actual Gains Are Less Than Expected

USD/JPY fell by 0.53% last week, driven by two forces: rising expectations of Fed rate cuts depressing the dollar, and rising expectations of Bank of Japan rate hikes.

According to Reuters, the Japanese government has signaled tolerance for BOJ rate hikes, and with BOJ Governor Ueda’s hawkish signals, the market has priced in about a 90% chance of a rate hike in December. Theoretically, rate hikes should strengthen the yen, but in reality — USD/JPY remains around 155, with gains far below expectations.

This reflects a deeper economic reality: the real long-term interest rate differential (nominal long-term rate minus inflation) is difficult to narrow quickly.

On one hand, under the expansionary fiscal support from Prime Minister Fumio Kishida’s government, Japan’s domestic inflation will likely stay elevated; on the other hand, the market expects only one rate hike by the BOJ in 2026. These factors limit the yen’s upside.

Market opinions on the yen’s future are divided. Mizuho Securities forecasts USD/JPY reaching 158 by the end of 2026, while Nomura Securities targets 140. This 20+ point difference reflects divergent views on the evolution of US-Japan interest rate differentials.

Next Week’s Technical and Trading Recommendations

EUR/USD: Has broken through key moving averages. If the Fed signals dovishness, the probability of further rise to 1.18 increases; if hawkish signals emerge, caution is advised at the support level of 1.1593.

USD/JPY: After breaking below the 21-day moving average, downward momentum may further accelerate, with 153 as a key support; if it reclaims the 21-day moving average, there is a higher chance of oscillating upward toward 157.

This week, focus on the Federal Reserve rate decision and developments in Russia-Ukraine negotiations. Since the European Central Bank has entered the late stage of its rate cut cycle, the Fed’s rate path will have a relatively larger impact on EUR/USD. Investors should closely monitor Powell’s wording, especially hints regarding the number of rate cuts in 2026.