Central Bank Decision Week Approaches: Euro and Yen Face Major Turning Points

This week’s financial markets feature two major central bank meetings, significantly increasing volatility expectations for the euro and yen. Last week (December 8 to December 12), market signals of caution were already evident— the US Dollar Index fell by 0.60%, while the euro rose by 0.84%, and the yen depreciated by 0.29%.

Federal Reserve Signals Easing, Euro as the Beneficiary

The Federal Reserve’s rate cut was less hawkish than expected; instead, it announced a reserve management purchase plan, buying $40 billion of short-term government bonds each month. This move was interpreted by the market as a precursor to quantitative easing, directly reducing the attractiveness of the dollar.

Fed Chair Jerome Powell’s remarks also indicated a dovish tone, with the latest dot plot suggesting only one rate cut possible by 2026, yet the market still bets on two rate cuts this year. This divergence in expectations has provided upward momentum for the euro.

EUR/USD gained 0.84% last week, reflecting dollar pressure and euro gains. On December 18, the European Central Bank’s rate decision will be key in determining the euro’s future trend. The market expects the ECB to keep rates unchanged, but comments from ECB President Christine Lagarde and the latest quarterly forecasts will be important clues for future policy directions.

Morgan Stanley believes that amid the divergence in monetary policies between Europe and the US, the euro could break above 1.23 in the first quarter of 2026. Technically, EUR/USD has already crossed above the 100-day moving average, with RSI and MACD indicators still showing bullish strength. The next target is around 1.18, with resistance near the previous high of 1.192. If it pulls back from high levels, the 100-day moving average at around 1.164 will provide support.

This week’s US November non-farm payroll data will be another variable influencing the euro’s movement—strong data could pressure EUR/USD, while weak data could push it higher.

Bank of Japan Rate Hike Imminent, Yen Faces a Turning Point

On December 19, the Bank of Japan will announce its latest rate decision. The market widely expects a 25 bps hike to 0.75%, the highest level in Japan in 30 years.

The rate hike itself has been largely priced in; the key variables now are BOJ Governor Kazuo Ueda’s stance on the pace of future hikes and his interpretation of the “neutral rate.” Nomura Securities predicts Ueda may maintain a cautious stance to keep policy flexibility, and this meeting is unlikely to signal a more hawkish rate hike than expected.

U.S. bank analysis is more nuanced: if the BOJ signals a dovish stance (dovish hike), USD/JPY will likely stay high, possibly surging toward 160 early next year. Conversely, if a more hawkish signal is conveyed (hawkish hike), it could trigger short covering in yen, causing USD/JPY to fall back toward 150, though this scenario is less probable.

Last week, USD/JPY rose by 0.29%, mainly reflecting market caution regarding the BOJ’s rate hike path. Technically, the pair has broken below the 21-day moving average; continued pressure could increase the likelihood of further decline, with support around 153. Conversely, if it reclaims the 21-day moving average, resistance is near 158.

This Week’s Trading Focus

The European Central Bank meeting, Bank of Japan meeting, and US non-farm payroll data are the three key highlights this week. The outlook for the euro and yen will largely depend on the outcomes of these policies and data releases. Any changes in expectations for the US and Japanese central banks’ policies will be central to exchange rate movements, so traders should closely monitor related announcements and technical positions.