In the era of diverging central bank policies, the Japanese Yen and Euro will face significant volatility challenges

Last Week’s Market Review

Last week (December 8 to December 12), the US dollar index fell by 0.60%, with performance among non-US currencies diverging. The euro rose by 0.84%, the Japanese yen declined by 0.29%, the Australian dollar edged up by 0.18%, and the British pound increased by 0.34%. Behind these changes are the re-adjustments in central bank policy expectations across countries.

The Softening of the Federal Reserve’s Stance and Its Future Impact on the Euro

EUR/USD rose by 0.84% last week, primarily driven by a mild shift in the Federal Reserve’s policy stance.

The Fed plans to cut interest rates by 25 basis points and announced the launch of the Reserve Management Purchase (RMP) program starting December, purchasing $40 billion of short-term government bonds each month. This move is interpreted by the market as an important signal of quantitative easing. Coupled with Chairman Jerome Powell’s more dovish comments than market expectations, the US dollar index declined for two consecutive days.

Notably, the latest dot plot only hints at a rate cut in 2026, but the market widely anticipates two rate cuts next year. This divergence in expectations reflects market uncertainty about future policy directions.

The European Central Bank (ECB) will announce its latest interest rate decision on December 18. The consensus is that rates will remain unchanged, but attention will focus on President Christine Lagarde’s policy speech and updated quarterly economic forecasts, as investors eagerly look for clues about the next policy shift. Morgan Stanley predicts that amid diverging monetary policies between Europe and the US, the euro could reach 1.23 in the first quarter of 2026.

From a technical perspective, EUR/USD has broken above the 100-day moving average, with RSI and MACD indicators both signaling continued bullish momentum. If policy divergence between Europe and the US intensifies, the euro’s upward target could be 1.18, with the next resistance near the previous high of 1.192. If it pulls back from high levels, the 100-day moving average around 1.164 will serve as support.

This week’s focus will be on the ECB meeting decision and the US November non-farm payrolls data. Weak non-farm data would further pressure the dollar, potentially accelerating the euro’s upward movement. Conversely, if the data exceeds expectations, EUR/USD may face short-term correction.

The Japanese Central Bank’s Rate Hike Is Confirmed—Can the Yen’s Rebound Continue?

USD/JPY rose by 0.29% last week, mainly reflecting market caution regarding the Bank of Japan’s rate hike path.

The Bank of Japan (BOJ) will announce its rate decision on December 19. The market widely expects a 25 basis point increase to 0.75%, which would be the highest rate level in Japan in 30 years. Since the rate hike expectation is already priced in, market focus shifts to Governor Kazuo Ueda’s stance on the pace of future rate hikes, especially his definition of the “neutral rate.”

Nomura Securities analysts believe Ueda may deliberately keep policy guidance vague to maintain flexibility, and this meeting is unlikely to signal a more aggressive rate hike pace or a higher terminal rate beyond market expectations.

U.S. banks suggest that if the BOJ adopts a “dovish rate hike” stance, it could support USD/JPY at higher levels, possibly pushing the pair toward 160. However, if the BOJ signals a “hawkish rate hike,” short covering of the yen could drive USD/JPY back toward 150. The probability of this scenario is relatively low.

From a technical standpoint, USD/JPY has broken below the 21-day moving average. Continued pressure at this level would increase downside risk, with 153 becoming an important support. Conversely, if it recovers above the 21-day moving average, resistance is seen at 158.

This week, attention should be on the BOJ meeting and US non-farm payroll data. Changes in rate hike expectations from Japan and the US will directly influence the direction of USD/JPY.