The US dollar strengthens while the yen depreciates rapidly, with frequent signals of central bank intervention [Forex Weekly Report Analysis]

Last Week Market Overview

In the past week (December 15-19), the US Dollar Index edged up by 0.33%, while non-US currencies showed divergent performances. The euro declined modestly (-0.23%), the British pound remained nearly flat (+0.03%), but the Japanese yen fell by 1.28%, and the Australian dollar also decreased by 0.65%. Overall, the US dollar continued its strengthening trend.

Yen Approaching Warning Line Amid Government Intervention Risks

Deep Causes Behind the Yen’s Plunge

Last week, USD/JPY rose by 1.28%, with the yen remaining under pressure. The depreciation was driven by multiple negative factors rather than a single cause.

The Bank of Japan did raise interest rates by 25 basis points as scheduled, but Governor Ueda Kazuo’s dovish tone disappointed the market. Worse, the Japanese government just approved a massive fiscal stimulus package worth 18.3 trillion yen, which directly offset the tightening effect of the rate hike. With a dual approach, the yen naturally struggled to hold its ground.

Market Expectations Diverge on Yen Depreciation

Sumitomo Mitsui Banking Corporation’s forecast is quite pessimistic, suggesting the yen could weaken to 162 by Q1 2026. JPMorgan, on the other hand, issued a key warning—if the yen depreciates beyond 160 in the short term, the likelihood of government intervention will rise sharply, and sharp exchange rate fluctuations could trigger strong measures by Japanese authorities.

Contrarily, Nomura Securities holds a more optimistic view. They believe that under the backdrop of Fed rate cuts, the US dollar will eventually weaken, and the yen could appreciate to around 155 by Q1 2026. This divergence reflects significant uncertainty in the market regarding the exchange rate outlook.

Focus for This Week

Investors should closely monitor the latest speeches by BOJ Governor Ueda Kazuo and any verbal interventions by Japanese authorities. If policy signals become more hawkish or verbal interventions escalate, USD/JPY could face downward pressure. From a technical perspective, USD/JPY has broken through the 21-day moving average, with MACD signaling a buy. If it can break above the 158 resistance level, the upward potential will further open; conversely, if it remains under pressure below 158, a correction may follow, with support around 154.

Euro Lacks Hawkish Support; Fed Rate Cut Outlook for 2026 in Doubt

ECB Maintains Steady Policy, Market Expectations Fall Short

The European Central Bank kept interest rates unchanged as expected, but President Lagarde did not provide the hawkish signals that markets had anticipated, disappointing bullish traders. Last week, EUR/USD rose and then fell, ending down by 0.23%.

US economic data was mixed; November non-farm payrolls showed varied results, and November CPI was below expectations. Major investment banks like Morgan Stanley and Barclays pointed out that these data were heavily affected by technical biases and statistical distortions, limiting their reference value. As a result, the market remains uncertain about the Fed’s rate cut path in 2026. Currently, the market prices in about a 66.5% chance of two rate cuts by the Fed in 2026, with a roughly 66% probability of a cut in April.

Institutions Are Optimistic About Euro’s Mid-Term Outlook

Danske Bank believes that, due to the Fed entering a rate-cut cycle while the ECB maintains its rates, the euro against the dollar has a solid foundation to strengthen in the medium term. The bank notes that the real interest rate differential, adjusted for inflation, may narrow, which favors the euro. Additionally, the recovery of European asset markets, increased hedging demand against dollar depreciation, and waning confidence in US institutions could support euro gains.

Technical Outlook and Key Focus

Chart analysis shows EUR/USD remains above multiple moving averages, with short-term room for further gains, with key resistance near the previous high of 1.18. If support is lost, attention shifts to the 100-day moving average at 1.165.

This week, focus should be on US Q3 GDP data and geopolitical developments. Stronger-than-expected GDP would boost the dollar and pressure EUR/USD; weaker data would be positive for the euro.

Summary and Outlook

Overall, the US dollar remains strong in the short term, with little sign of reversal. However, yen depreciation is approaching a sensitive zone where government intervention could occur, and the euro may rebound amid contrasting ECB policies. Investors should closely watch upcoming central bank speeches and policy signals, as these will directly influence key exchange rates including USD, JPY, EUR, and CNY.