Federal Reserve policy shift shakes up the foreign exchange market! Will the euro and yen exchange rates experience a reversal?

US Dollar Weakens, Euro Rises Against the Wind

In the last trading week (11/10-11/14), the US Dollar Index declined by 0.28%, with performance among major currencies diverging. The euro saw the most significant gain, rising by 0.46%, followed closely by the Australian dollar, which increased by 0.68%. The British pound edged up slightly by 0.08%, while the Japanese yen came under pressure and fell by 0.73%.

The recent weakening of the US dollar is driven by the combined effect of two key factors. First, US employment data was relatively soft, weakening the Federal Reserve’s justification for maintaining high interest rates. Second, the US government shutdown, which lasted 43 days, finally ended on November 12, when Trump signed a temporary funding bill. As a result, the market shifted its focus to closely monitoring upcoming economic data.

Fed December Rate Cut Hangs in the Balance, Data Is Key

With the government reopening, upcoming economic data will directly influence the Fed’s policy direction. The September non-farm payroll report on November 20, the third-quarter GDP revision on November 26, and October’s PCE Price Index are all market focal points.

Market expectations for the Fed’s December policy move are shifting. Currently, Fed funds futures reflect a 45.8% probability of a 25 bps rate cut, and a 54.2% chance of holding rates steady. This indicates that recent “hawkish” comments from Fed officials have already had a tangible impact on market expectations.

If the labor market deteriorates further, it will reinforce expectations of a rate cut, thereby weakening the dollar and supporting euro gains. Conversely, if employment data exceeds expectations and remains strong, it will limit the scope for rate cuts, potentially supporting the dollar and putting pressure on the euro to retrace.

Focus this week: The market will closely monitor US September non-farm data, October FOMC minutes, and November PMI data from Europe and the US. Any subtle change in expectations for rate cuts will influence the short-term trend of the euro.

Technical outlook: EUR/USD has broken above the 21-day moving average but faces resistance at the 100-day moving average of 1.166. A successful breakout could open further upside space. Failure to do so may see support at the previous low of 1.146.

Yen Under Pressure, New Prime Minister’s Policies as a Variable

Last week, USD/JPY rose by 0.73%, with the yen’s continued depreciation reflecting market expectations of Japan’s new Prime Minister, Sanae Takaichi’s, policy stance. Since Takaichi took office, concerns have grown over her aggressive fiscal expansion policies and the dovish stance of the Bank of Japan, leading to prolonged yen weakness.

This week, the Takaichi government will unveil a major economic stimulus package, estimated at 17 trillion yen. Goldman Sachs analysts believe that an unexpectedly large stimulus could reignite concerns about Japan’s fiscal discipline. This may push Japan’s long-term sovereign bond yields to new highs and continue to exert downward pressure on the yen.

It is worth noting that Japan’s government agencies still lack sufficient measures to curb yen depreciation. Mitsubishi UFJ Morgan Stanley Securities predicts that, to protect foreign exchange reserves, relevant Japanese authorities might tolerate USD/JPY rising to around 161 yen per dollar.

Key focus this week: The scale and content of Japan’s stimulus plan will be critical. If the stimulus exceeds expectations, USD/JPY could further test higher levels.

Technical status: USD/JPY remains supported by multiple moving averages, with RSI indicating strong bullish momentum. In the short term, USD/JPY may once again challenge the 155 level, opening larger upside potential. However, if support at that level fails, technical correction risks increase, with the 21-day moving average at 153.38 becoming a key support level.

This week’s key focus: Changes in Fed rate cut expectations, economic data from Europe and the US, and the implementation of Japan’s stimulus plan will dominate the forex market direction. The performance of the euro and yen warrants close attention.