Analysis of the reasons behind the yen's decline! Central bank policy expectation shift drives significant exchange rate fluctuations

Market Focus on Central Bank Policy Expectations and Yen Turning Point

This week, the foreign exchange market showed clear divergence, with USD/JPY falling by 0.16%, indicating significant changes in central bank policy expectations behind the scenes. Bank of Japan Governor Kazuo Ueda stated on December 1st that he would consider the possibility of a rate hike in December. This statement was seen by the market as the most explicit policy signal shift to date. Swap market data reflect that market expectations for the BOJ to raise rates on December 19th have risen to 62%, a sharp increase from 30% two weeks ago, demonstrating a reassessment of the central bank’s hawkish stance.

Meanwhile, expectations for Fed rate cuts have also increased, creating a dual pressure on USD/JPY. Data from the CME FedWatch tool show that the market anticipates an 87.6% chance of the Fed cutting rates in December. This combination—rising expectations of Fed rate cuts coupled with strengthening expectations of BOJ rate hikes—directly propelled the yen’s appreciation momentum.

Deepening Reasons for Yen Decline: Policy Expectations and Market Reassessment

Nomura Securities pointed out that as expectations for a December Fed rate cut intensify and BOJ rate hike expectations strengthen, the long-term consolidation pattern of USD/JPY is being broken. This reflects a new understanding of monetary policy divergence—when one side faces a rate-cut cycle and the other prepares to hike, the low-interest-rate currency inevitably faces depreciation pressure.

Comments from Japanese Prime Minister Sanae Yoshimura further reinforced market expectations for policy adjustments. She stated that the government would closely monitor exchange rate fluctuations and be prepared to take “necessary” actions in the foreign exchange market. This implied official support for yen appreciation, further boosting market confidence in rate hike expectations.

Euro/US Dollar Rebound: The Other Side of Rate Cut Expectations

Against the backdrop of a generally weakening dollar, EUR/USD rose by 0.71%, while the US dollar index fell by 0.72%. Non-dollar currencies broadly benefited, with the Australian dollar up 1.48%, the British pound up 1.03%, and the Japanese yen up 0.16%, forming a consensus view of dollar weakness.

Weak US labor market data, lower-than-expected core PPI growth, and dovish comments from Fed officials like Waller and Williams collectively boosted expectations for rate cuts. ING believes that EUR/USD, already near 1.16, could rise to 1.17 in the short term. If geopolitical risks subside and US data continues to weaken, it could even reach 1.18 before year-end. Progress in Russia-Ukraine peace talks also provided additional support for the euro.

Technical Outlook: Key Levels for Breakouts and Supports

USD/JPY is approaching the critical 21-day moving average. If it breaks below this line, a larger downside space could open, with technical support levels at 154 and 153. However, if it holds above the 21-day moving average, USD/JPY is likely to oscillate, making it difficult to form a one-sided trend in the short term.

EUR/USD has formed a “W” bottom, with RSI indicating continued bullish strength. A breakout above resistance at 1.1656 could trigger a larger upward move. Conversely, if it remains under pressure below the 100-day moving average, the probability of a correction increases, with support levels at 1.155 and 1.149.

Key Market Focus This Week

The market will closely watch statements from Japanese officials, media hints, and US economic data. If expectations for a BOJ rate hike further strengthen, USD/JPY could decline further. Attention should also be paid to developments in US-Russia talks and US September PCE data—if tensions in Russia-Ukraine ease and inflation continues to fall, EUR/USD could rise further; conversely, if negotiations falter or inflation exceeds expectations, EUR/USD may face downward pressure.