Forex turbulence week: Yen reaches critical depreciation point, can the Euro rebound?

Forex Market Weekly Changes

Last week (December 15-19), the international foreign exchange market continued to show divergence. The US dollar index rose by 0.33%, while non-dollar currencies experienced chaos — the euro fell by 0.23%, the Australian dollar retreated by 0.65%, the British pound remained roughly flat, and the Japanese yen dropped significantly by 1.28%, hitting a recent low.

Yen Approaching Devaluation Limits, Policy Shift Signals Emerging

Exchange Rate Trend Analysis

The USD/JPY surged sharply last week, approaching the 158 level, with a gain of 1.28%. The core driver behind this was that the Bank of Japan’s recent rate hike decision failed to alter market expectations.

Although the Bank of Japan raised its policy interest rate by 25 basis points as scheduled, Governor Ueda’s speech was somewhat dovish, not conveying enough tightening signals. More critically, the Japanese government announced a large-scale fiscal support plan totaling 18.3 trillion yen, which directly weakened the tightening effect of the rate hike, creating a contradictory situation of “central bank rate hikes, government stimulus.”

Intervention Risks Rising

Market participants generally believe that the yen’s depreciation is nearing the government’s tolerance limit. JPMorgan explicitly warned that if USD/JPY breaks through the 160 level in the short term, the likelihood of direct market intervention by the Japanese government will increase significantly. This serves as an important risk warning for technical traders.

Nomura Securities offers a relatively optimistic forecast, believing that as the Federal Reserve enters a rate-cutting cycle, the dollar will generally weaken, making further yen depreciation unlikely. The firm predicts that by Q1 2026, the yen could appreciate to around 155.

In contrast, Sumitomo Mitsui Banking Corporation expects the next rate hike to be delayed until October 2026, and predicts the yen may depreciate to 162 before Q1 2026. This divergence among institutions reflects the high uncertainty surrounding the yen’s future trend.

Impact on USD/CNY

The sharp depreciation of the yen has also affected other Asian currencies. USD/CNY has come under pressure, which has chain reactions on China-Japan trade settlements and cross-border investments. Exporters and importers need to pay close attention to the exchange rate risks brought by yen depreciation.

Focus This Week

Investors should closely monitor the latest remarks from BOJ Governor Ueda and whether Japan’s officials escalate verbal interventions. Any hawkish statements or direct intervention actions could trigger a rapid rebound of USD/JPY.

On the technical side, USD/JPY has broken above the 21-day moving average, with MACD showing a buy signal. If it can hold above 158, there is a higher probability of further rise to 160+; however, this may also trigger government intervention. Conversely, if it cannot hold above 158, a correction could target the 154 support zone.

Can the Euro Bottom Out and Rebound?

Contrasting Central Bank Policies

The euro/USD (EUR/USD) rose and then fell last week, ending down 0.23%. The European Central Bank’s decision to keep interest rates unchanged was in line with expectations, but President Lagarde failed to deliver the strong signals the market had been waiting for.

In contrast, US economic data was mixed. November non-farm payrolls were mediocre, and November CPI data fell short of expectations. These data points could have supported the euro. However, major investment banks like Morgan Stanley and Barclays issued warnings, stating that these figures are heavily affected by technical and statistical distortions, making it difficult to accurately reflect the true economic situation.

Market expectations for the Fed’s rate cuts in 2026 are relatively clear — only two cuts are expected, with a 66.5% probability of a cut in April.

Where Is the Rebound Opportunity?

Danske Bank offers an interesting analysis: if the Fed continues to cut rates while the ECB remains on hold, the real interest rate gap between the two will narrow, which could favor euro appreciation. Additionally, potential recovery in European asset markets, increased global investor hedging against US dollar risks, and shaken confidence in US policy stability could all serve as potential catalysts for the euro.

Focus This Week

The key focus is the US Q3 GDP data. If the data exceeds expectations, the dollar could gain support, putting pressure on EUR/USD; if it underperforms, it could benefit the euro. Any new developments in geopolitical situations should also be closely watched.

Technically, EUR/USD remains above multiple moving averages, with short-term potential for further gains. Resistance is seen near the previous high around 1.18. If it pulls back, the first support is at the 100-day moving average around 1.165.

Market Data Recap

Last week, the US dollar index increased by 0.33%, with mixed movements among major non-dollar currencies: euro down 0.23%, yen down 1.28%, Australian dollar down 0.65%, and the British pound roughly flat.