Forex Market Weekly Scan: Yen Continues to Weaken, Rate Hike Policy Effects Discounted

Multi-Currency Volatility Pattern

In the last trading week (December 15-19), the global foreign exchange market showed a divergence trend. The US dollar index rose slightly by 0.33%, while non-USD currencies performed variably. The euro, as the European single currency, declined by 0.23% under pressure, the Japanese yen experienced the most significant drop, falling 1.28% for the week, the Australian dollar declined by 0.65%, and the British pound rose marginally by 0.03% against the trend. Against this backdrop, emerging market currencies such as the South African rand versus the Taiwan dollar were also affected by the strengthening of the US dollar globally.

Yen Under Pressure Approaching Psychological Level, Intervention Signals Growing

The USD/JPY performed most notably this week, with a weekly increase of 1.28%, mainly driven by the Bank of Japan’s “moderate rate hike” policy.

The Bank of Japan raised its policy interest rate by 25 basis points as scheduled, but Governor Ueda Kazuo was cautious in his remarks at the press conference, causing market confusion about the future policy outlook. Meanwhile, Japan’s new government launched a substantial fiscal support plan totaling 18.3 trillion yen, which largely offset the tightening effects of the rate hike.

In terms of exchange rates, USD/JPY has approached the 158 level. JPMorgan issued a warning that if the yen depreciates beyond 160 in the short term, it would meet the criteria for “abnormal exchange rate fluctuations,” significantly increasing the likelihood of market intervention by Japanese authorities. In contrast, Nomura Securities offered a different view, believing that under the global rate-cutting environment, the long-term trend of a weakening dollar is hard to reverse, and forecasted that the yen will appreciate to around 155 in the first quarter of next year. Sumitomo Mitsui Banking Corporation is more pessimistic, predicting that the USD/JPY could further depreciate to 162 in the first quarter of 2026.

On the technical side, USD/JPY has stabilized above the 21-day moving average, and the MACD indicator signals a buy. If it breaks through the 158 level, further upside potential could be unlocked. Conversely, if resistance is encountered below 158, the risk of a pullback increases, with support around 154.

This week, attention should be paid to the subsequent comments from the Bank of Japan governor and any verbal intervention signals from officials. If the governor adopts a hawkish tone or if authorities escalate intervention, USD/JPY could decline.

Euro Rebounds and Retraces, Fed’s 2026 Rate Cut Path Still in Question

The EUR/USD trend showed a “rise then fall” V-shaped pattern, ultimately closing the week down by 0.23%.

While the European Central Bank maintained interest rates as expected, President Lagarde did not deliver the hawkish signals anticipated by the market, surprising investors. On the US side, November employment data was mixed, and inflation indicators during the same period were below expectations. Major investment banks like Morgan Stanley and Barclays pointed out that these statistics were significantly affected by technical factors and seasonal adjustment biases, making it difficult to accurately reflect the economic fundamentals.

Regarding the Fed’s rate cut expectations, the market broadly predicts two cuts in 2026, with a 66.5% probability of a rate cut in April. Institutions like Danske Bank are optimistic about the euro’s medium-term performance, reasoning that the Fed may enter a rate-cut cycle while the European Central Bank maintains high interest rates, widening the real interest rate differential. Additionally, the European asset recovery, increased dollar hedging demand, and declining US systemic confidence will support the euro.

From a technical perspective, EUR/USD remains above multiple moving averages, with the possibility of challenging the previous high of 1.18 in the short term. If supported, the 100-day moving average around 1.165 could serve as a defense line.

Market focus this week includes the release of US Q3 GDP data. If growth exceeds expectations, it will be bullish for the dollar; otherwise, it will favor the euro/USD.

Market Overview

This week, close attention should be paid to geopolitical developments and the actual performance of US economic data, as these will be key factors in determining the direction of major currency pairs.