The Japanese Yen suddenly rebounds! Central bank signals interest rate hike, shocking the foreign exchange market

The Bank of Japan’s Hawkish Turn Causes a Major Reversal in Yen Decline

The recent market shock comes from Japan. Bank of Japan Governor Kazuo Ueda sent the clearest hawkish signal to date on December 1st—considering the pros and cons of a December rate hike and making an appropriate decision. This statement directly reversed market expectations for the yen.

Swap market data shows that the probability of the Bank of Japan raising interest rates in December has surged from 30% two weeks ago to 62%. Japanese Prime Minister Fumio Kishida also stated that the government will closely monitor exchange rate fluctuations and is prepared to take “necessary” actions at any time, triggering heightened market alert for Japanese authorities intervention.

This is intuitively reflected in the exchange rate, with USD/JPY falling 0.16% last week. Nomura Securities pointed out that as expectations for a BOJ rate hike strengthen, the consolidation pattern of USD/JPY may be broken, and the yen’s trend faces a major turning point.

Fed Rate Cut Expectations Surge, Euro and Yen Rise Together

Another market turning point last week came from the United States. Weak US labor market data, lower-than-expected core PPI growth, and dovish comments from Fed officials like Waller and Williams all contributed. According to CME FedWatch Tool, the market expects an 87.6% chance of a rate cut by the Federal Reserve in December, with only a 12.4% chance of no cut.

This dollar weakness has driven gains in non-USD currencies across the board. The US Dollar Index fell 0.72%, the euro rose 0.71%, the Australian dollar increased 1.48%, the British pound gained 1.03%, and the yen also appreciated 0.16%.

Euro/US Dollar Rebounds Significantly, Rise to 1.17 Expected

Euro/US dollar rose 0.71% last week, mainly supported by soaring expectations of Fed rate cuts and progress in Russia-Ukraine peace talks. In contrast to the Fed’s rate cut outlook, the interest rate market pricing indicates that the European Central Bank has ended its current rate-cut cycle, forming a stark contrast.

ING believes that EUR/USD is approaching 1.16 on the basis of recent gains and could rise to 1.17 in the short term. If geopolitical risks subside and US data remains weak, it could even reach 1.18 before the end of the year.

On the technical side, EUR/USD is forming a “W” bottom, with RSI indicating strong bullish momentum. Breaking through resistance at 1.1656 could open up larger upside potential. Support levels are at 1.155 and 1.149.

This Week’s Focus: Reasons for Yen Decline and Market Rhythm

This week, attention should be on US-Russia talks, statements from Japanese officials, media rumors, and US PCE data. If expectations for a BOJ rate hike further strengthen, USD/JPY could decline further. Technically, USD/JPY is approaching the 21-day moving average; a break below this line could trigger a larger downward move, with support at 154 and 153. If the 21-day moving average holds, a choppy sideways trend is likely.

Simultaneously, monitor the Russia-Ukraine situation and inflation trends—if negotiations progress and inflation declines, EUR/USD will further rise; otherwise, it will fall. The forex market is in a sensitive period of policy turning points, and the reasons behind the yen’s decline and the euro’s rise both point to a reshaping of central bank policy expectations.