Divergence in central bank policies triggers huge shocks in the forex market! Key decisions from Japan and Europe this week will rewrite the market trend

Market Overview of the Week

In this cycle (12/8-12/12), the foreign exchange market showed a divergence pattern, with the US dollar index falling by 0.60%, and non-US currencies experiencing mixed movements. The euro rose by 0.84%, the British pound increased by 0.34%, the Australian dollar edged up by 0.18%, while the Japanese yen declined by 0.29%, reflecting an overall adjustment in global central bank policy expectations.

1. Federal Reserve Policy Shift Supports European Currencies, ECB Decision Becomes a Key Variable

Fed Decision Reveals Dollar Momentum

Last week, the euro/USD’s rise was mainly driven by dollar depreciation. The Federal Reserve planned to proceed with a 25 bps rate cut, but more attention was on the launch of the Reserve Management Purchase (RMP) plan—buying $40 billion of short-term government bonds monthly. Investors generally interpret this as a signal of a return to quantitative easing (QE). Chairman Powell’s speech was more dovish than expected, leading to a two-day consecutive decline in the dollar index.

It is noteworthy that the latest dot plot indicates only one rate cut possible by 2026, which contrasts sharply with market expectations of two rate cuts by the Fed next year.

ECB Meeting Focus, Governor Guidance Becomes the Spotlight

On December 18, the European Central Bank will announce its latest interest rate decision. The market widely expects rates to remain unchanged, but the real focus will be on President Lagarde’s comments and the latest quarterly economic forecasts, as investors seek signals on when the ECB might shift its policy stance.

Morgan Stanley’s research team states that amid the divergence of monetary policies between Europe and the US, the euro/USD is expected to rise to 1.23 in the first quarter of 2026.

Technical Outlook Shows Bullish Advantage

The euro/USD has stabilized above the 100-day moving average, with RSI and MACD indicators both showing strong bullish momentum. The next target is set at 1.18; if broken, resistance will focus on the previous high of 1.192. If a reversal occurs and prices fall back, the 100-day moving average around 1.164 will provide support.

Key Trading Focus This Week

This week, the primary focus will be on the ECB meeting and the US November non-farm payrolls data. If the non-farm data underperform expectations, it will further weaken the dollar, and euro/USD could continue to rise; conversely, if data exceeds expectations, euro/USD may face short-term correction pressure.

2. Bank of Japan Rate Hike Expectations Loom, Can Yen Reversal Be Achieved?

Yen Dilemma Under BOJ Rate Hike Expectations

Last week, USD/JPY rose by 0.29%, reflecting market caution regarding the Bank of Japan’s 2026 rate hike path. On December 19, the BOJ will release its latest rate decision, with widespread expectations of a 25 bps hike to 0.75%, reaching the highest level in nearly 30 years.

Since the rate hike itself has been largely priced in, focus has shifted to Governor Ueda Kazuo’s hints on future rate hike pace, especially how he will articulate the “neutral interest rate.”

Diverging Central Bank Attitudes Drive Exchange Rate Divergence

Nomura Securities judges that Ueda Kazuo may maintain a vague stance on the neutral interest rate to preserve policy flexibility. It is unlikely that this meeting will deliver a more hawkish rate hike pace or terminal rate target than what the market has already priced in.

Analysis from Bank of America suggests that if the BOJ adopts a “dovish rate hike” stance, it will continue to support USD/JPY at high levels, potentially pushing the pair toward 160 early next year. Conversely, if a “hawkish rate hike” stance is taken, it could trigger a short covering wave, causing USD/JPY to retreat toward 150, though this scenario is less probable.

Technical Resistance Downward Pressure

USD/JPY has broken below the 21-day moving average. Continued pressure below this line will significantly increase downside risk, with support around 153. If it reclaims the 21-day moving average, resistance will be at 158.

Key Trading Focus This Week

The core focus this week will be the BOJ rate decision and US non-farm payroll data. Changes in rate hike or cut expectations from the BOJ and Fed will be key factors determining USD/JPY direction. As a safe-haven currency, whether the yen can appreciate from around 180,000 yen will depend on clear signals from central bank policies.