Central bank policies are coming one after another! Major events for the Japanese Yen and Euro are imminent on Tuesday

This week, the foreign exchange market enters a critical moment. On December 18th, the European Central Bank will announce its interest rate decision, followed by the Bank of Japan on December 19th. Changes in the policy stances of these two major central banks could trigger intense volatility in the yen and euro. Market participants should closely monitor the trading opportunities brought by these two meetings.

Last Week Review: US Dollar Under Pressure, Divergence in Non-US Currencies

Last week (December 8th - December 12th), the US Dollar Index fell by 0.60%, pressured overall by the Federal Reserve’s signals of moderation. Specifically, the euro appreciated by 0.84%, leading the gains, the British pound rose by 0.34%, the Australian dollar increased slightly by 0.18%, while the yen depreciated by 0.29%.

The Federal Reserve cut its policy interest rate by 25 basis points as expected, and also announced the launch of the Reserve Management Purchase (RMP) program, increasing holdings of short-term government bonds by $40 billion per month, widely interpreted as a sign of quantitative easing. Chairman Powell’s tone was relatively dovish, leading the market to adopt a cautious outlook on the dollar. Notably, the latest dot plot indicates that there may be only one rate cut opportunity in 2026, but traders are still betting on two rate cuts by the Fed next year.

Can EUR/USD Continue Its Strength? ECB Speech Is Key

EUR/USD rose by 0.84% last week, mainly because the market assessed the Fed’s policy stance as lacking sufficient hawkish signals.

On December 18th, the European Central Bank will release its latest interest rate decision. The consensus expectation is that the ECB will keep rates unchanged. Investors will focus on President Lagarde’s comments and the latest quarterly forecasts to catch any signs of a shift toward policy tightening.

Morgan Stanley analysts pointed out that, amid widening policy differences between the US and European central banks, EUR/USD is expected to reach 1.23 in the first quarter of 2026. From a technical perspective, EUR/USD has stabilized above the 100-day moving average, with RSI and MACD indicators still showing strong buying momentum. Further resistance is expected around 1.18; if broken, the next hurdle is the previous high of 1.192. Conversely, if the price pulls back, support will be around the 100-day moving average at 1.164.

This week, the key focus is on the US November non-farm payroll data. Weak data would further weaken the dollar, and EUR/USD could rally; on the other hand, better-than-expected data could lead to a short-term correction.

BoJ Rate Hike Hopes Rise, Yen Depreciation Dilemma Awaits Breakthrough

USD/JPY rose by 0.29% last week, with the market adopting a wait-and-see attitude toward the Bank of Japan’s upcoming rate hike.

On December 19th, the Bank of Japan will announce its latest interest rate decision. The market widely expects a 25 basis point hike to 0.75%, which would be the highest rate in the past 30 years.

Since the rate hike has been fully absorbed by the market, traders are now focusing on how Governor Ueda will describe the future path of rate increases, especially his understanding of the “neutral interest rate.” Nomura Securities suggests that Ueda may remain vague on the “neutral interest rate” to maintain policy flexibility. A less likely scenario is the release of a more aggressive rate hike pace or a higher final rate target than market expectations.

Research from Bank of America indicates that if the BoJ adopts a “dovish rate hike” stance (implying a slower rate hike cycle), USD/JPY will remain high and could surge toward 160 early next year. However, if the BoJ shifts to a “hawkish rate hike” (signaling faster and more decisive increases), short positions will be heavily covered, and USD/JPY could retreat toward 150. Nonetheless, this scenario is less probable.

From a technical perspective, USD/JPY has broken below the 21-day moving average support. Continued pressure below this line would significantly increase downside risk, with support around 153. If it reclaims above the 21-day moving average, resistance is seen at 158.

The two main forex focuses this week are the BoJ meeting decision and US non-farm payroll data. Expectations adjustments from both central banks will directly influence the direction of USD/JPY.

AUD Movement: Mild Rise Awaiting Direction Confirmation

The Australian dollar rose slightly by 0.18% last week, with a relatively moderate gain. Its future performance will depend on the further evolution of the US dollar trend and changes in global risk sentiment. Investors can refer to AUD charts, observe its correlation with the US dollar index, and judge whether it will continue to decline with the dollar or move independently higher.