Is the USD/JPY trend about to reverse? Policy divergence triggers market divergence

Last Week’s Market Summary

From December 15 to December 19, the foreign exchange market saw the US dollar index rise slightly by 0.33%, while non-US currencies performed unevenly. The Japanese yen depreciated the most, falling 1.28% for the week; the euro declined by 0.23%; the Australian dollar dropped 0.65%; and the British pound remained nearly flat, gaining only 0.03%.

ECB Holds Steady, Fed Rate Cut Expectations Still Uncertain

The European Central Bank’s decision to keep interest rates unchanged was in line with expectations, but President Lagarde’s remarks did not provide the hawkish signals the market was hoping for. This caused the EUR/USD to initially rise then fall back, ending the week down 0.23%.

US data presented a mixed picture. November employment figures were inconsistent, and CPI growth was lower than economists’ previous forecasts. Investment banks like Morgan Stanley and Barclays pointed out that these data are heavily affected by seasonal adjustments and statistical noise, insufficient to reflect the true economic trend.

Currently, the market anticipates the Fed’s policy path through 2026, with a general expectation of two rate cuts, and about a 66.5% probability of starting rate cuts in April.

Analysts at Danske Bank are optimistic about the euro’s outlook. They note that the Fed’s rate cuts combined with the ECB maintaining stable rates will narrow the real interest rate differential, supporting the euro. Additionally, factors such as increased European asset attractiveness, hedging against US dollar depreciation risks, and declining US institutional confidence will also boost the euro.

This week, the market will focus on the release of US Q3 GDP data and geopolitical developments. If GDP exceeds expectations, the dollar will benefit and the euro may come under pressure; conversely, the euro could gain some breathing room. Technically, EUR/USD remains above multiple moving averages, with resistance around the previous high near 1.18, and support at the 100-day moving average around 1.165.

Yen Under Heavy Depreciation Pressure, Bank of Japan Policy Contradictions

Last week, the yen weakened against the dollar, with USD/JPY rising 1.28%. The main driver behind this was the lack of decisiveness in the Bank of Japan’s policy stance.

Although the BOJ raised interest rates by 25 basis points as scheduled, Governor Ueda’s comments carried a clear dovish tone, disappointing the market. To make matters worse, Japan’s new cabinet approved a fiscal stimulus package totaling 18.3 trillion yen, which directly offset the tightening effect of the rate hike.

Long-term expectations suggest that the BOJ will only raise rates once by 2026, possibly in October. The Sumitomo Mitsui Banking Corporation predicts that by Q1 2026, the yen could further depreciate to 162 against the dollar.

However, JPMorgan issued a warning: if the yen depreciates past the 160 level in the short term, this will be seen as abnormal exchange rate volatility, increasing the likelihood of government intervention. Nomura Securities holds an opposite view, believing that under the backdrop of Fed rate cuts and a weakening dollar, the yen will find it difficult to continue depreciating, and expects the yen to appreciate to 155 in Q1 2026.

This week, close attention should be paid to Governor Ueda’s speeches and whether Japanese authorities escalate verbal interventions. If comments lean toward tightening or intervention increases, USD/JPY could decline. From a technical perspective, USD/JPY has broken above the 21-day moving average, and the MACD shows a buy signal. If it successfully breaks through the 158 resistance level, the upward momentum could further expand. Conversely, if it faces resistance below 158, the risk of a pullback increases, with support at 154.