Foreign exchange market landscape under diverging central bank policies: USD trend forecast and bi-weekly resolution preview

Last Week Review and Market Pulse

During the trading week from December 8 to December 12, the US dollar index declined by 0.60% under pressure, while non-US currencies showed divergence. The euro performed the strongest, rising by 0.84% for the week, followed by the British pound which increased by 0.34%, the Australian dollar slightly up by 0.18%, and the Japanese yen reversing course and falling by 0.29%. The driving force behind this divergence lies in the Fed’s policy shift and the differentiated expectations for global central bank policy pacing.

The Fed’s Dovish Tilt Strengthens the Euro, USD Trend Faces Directional Dilemma

Market Impact of the Fed’s Policy Shift

Last week, the Federal Reserve proceeded with a 25 basis point rate cut as expected, but the accompanying policy signals are more noteworthy. The initiation of the Reserve Management Purchase (RMP) program—purchasing $40 billion of short-term government bonds monthly—was widely interpreted by traders as a cycle of quantitative easing (QE), which undoubtedly exerted direct downward pressure on the dollar. Fed Chair Jerome Powell’s dovish language in his post-meeting remarks further intensified this market expectation, leading to a sharp decline in the dollar index over two consecutive trading days.

It is worth noting that the latest dot plot shows the Fed expects only one rate cut by 2026, which contrasts with the market’s widespread expectation of two cuts. This gap will continue to drive dollar volatility in the coming months.

Significance of the European Central Bank (ECB) Decision for EUR/USD

EUR/USD gained 0.84% last week, and the upcoming ECB meeting on December 18 will be crucial in determining the direction of this currency pair. The market generally expects the ECB to keep rates unchanged, but investors are more focused on President Lagarde’s statements, especially her hints about when tightening policy might occur and the implicit policy bias in the latest quarterly forecast.

Morgan Stanley’s research team predicts that, considering the gradual divergence in monetary policies between Europe and the US, EUR/USD could rise to 1.23 by the first quarter of 2026.

Data and Technical Analysis for This Week

EUR/USD has successfully stabilized above the 100-day moving average. Both the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) indicators show that bullish momentum remains strong. The short-term target is 1.18; if this level is broken, the previous high of 1.192 will become a new resistance. Conversely, if the pair retraces, support is expected around 1.164 near the 100-day moving average.

This week’s key data is the US November Non-Farm Payrolls report. If the data underperforms expectations, it will further weaken the dollar and push EUR/USD higher; if it exceeds expectations, a short-term correction and pullback may occur.

Bank of Japan Rate Hike Path Becomes Focus, USD/JPY Outlook Has Variables

Rate Hike Imminent, Market Fully Priced In

USD/JPY rose 0.29% last week, with the market having fully priced in the Bank of Japan’s rate hike prospects. Consensus expects the BOJ to announce a 25 basis point increase on December 19, raising the policy rate to 0.75%, the highest in nearly 30 years.

However, the rate hike decision itself has already been largely digested by the market. Traders are now focusing on Governor Ueda Kazuo’s stance on the future rate hike path, especially his definition and outlook on the so-called “neutral interest rate.”

Institutional Views and Rate Hike Style Judgment

Nomura Securities believes Ueda Kazuo is likely to maintain ambiguity on the neutral interest rate issue to preserve policy flexibility. Under this logic, it is less likely that the upcoming meeting will signal a more hawkish pace of rate hikes than what the market has already priced in.

In contrast, US banks offer a binary judgment framework. If the BOJ adopts a “dovish rate hike”—meaning the decision is purely to respond to inflation without strong confidence in economic outlook—USD/JPY will likely remain high and possibly approach 160 in early 2026. If the language turns “hawkish,” it could trigger a large-scale short covering of yen positions, pushing the pair toward 150. However, given the current economic environment, the probability of the latter scenario is relatively low.

Technical Analysis and Support/Resistance Levels

USD/JPY recently broke below the 21-day moving average. If this moving average continues to exert downward pressure, the likelihood of further decline increases, with support around 153. Conversely, if the pair reclaims the 21-day moving average, resistance is targeted at 158.

This week, close attention should also be paid to the US November Non-Farm Payrolls data. Changes in expectations for rate hikes or cuts by the BOJ and Fed will be key variables in determining the medium-term trend of USD/JPY.

Summary of USD Outlook and Trading Insights

This week’s double central bank meetings (ECB on the 18th, BOJ on the 19th) combined with key US employment data will form the most critical forex turning point of the month. The USD’s directional decision depends on the specific interpretation of the Fed’s rate cut expectations and the divergence in global central bank policies. Investors should closely monitor related announcements and officials’ speeches, and adjust their positions flexibly within the USD trend forecast framework.