The US dollar is strong, and the yen is under pressure! The exchange rate approaches 158, prompting Japanese authorities to be cautious of rising tensions [Forex Weekly Report]

Last Week’s Market Scan (12/15-12/19)

Last week, the foreign exchange market showed clear divergence. The US dollar index closed up by 0.33%, with non-dollar currencies fluctuating. The Japanese yen was under the most pressure, declining by 1.28% for the week; the euro fell by 0.23%, and the Australian dollar dropped by 0.65%, while the British pound rose slightly by 0.03%.

Accelerated Yen Depreciation and Signs of Policy Intervention Emerge

USD/JPY experienced the largest increase last week, rising by 1.28%, mainly due to the market’s “dovish” reaction to the Bank of Japan’s rate hike decision.

Although the Bank of Japan raised its policy rate by 25 basis points as scheduled, Governor Ueda Haruhiko’s remarks at the press conference were cautious, failing to send the strong signals the market expected. More significantly, Prime Minister Fumio Kishida’s cabinet immediately announced a fiscal stimulus package totaling 18.3 trillion yen, directly weakening the tightening stance of the central bank.

Diverging Depreciation Expectations

Market opinions on the future trend of the yen against the dollar are mixed. Sumitomo Mitsui Banking Corporation expects the yen to continue weakening, with a potential depreciation to 162 in the first quarter, given that the next rate hike window is not until October 2026. However, JPMorgan warns that if USD/JPY short-term falls below 160, it will be considered an abnormal fluctuation, and the probability of government intervention will significantly increase.

Nomura Securities holds the opposite view, believing that the Fed’s rate cut cycle has begun, making the dollar weak and difficult to strengthen, with the yen expected to appreciate to 155 in the first quarter.

Technical Indicators Are Positive

From a technical perspective, USD/JPY has broken above the 21-day moving average, and the MACD indicator signals a buy. If the pair can effectively hold above the 158 resistance level, there is room for further upward movement. However, support is located at 154. This week, attention should be paid to Governor Ueda’s speeches and the Japanese authorities’ verbal intervention efforts. Any hawkish statements or escalated intervention measures could trigger a correction in USD/JPY.

Euro Fluctuations and Rate Cut Expectations Dominate

EUR/USD rose initially and then fell last week, ultimately closing down by 0.23%. The ECB kept interest rates unchanged as expected, but President Lagarde did not provide the hawkish signals the market anticipated, resulting in a loss for bullish traders.

US data quality is questionable. November non-farm payrolls and CPI figures were weak, prompting banks like Morgan Stanley and Barclays to warn that these data show obvious technical distortions and statistical biases, which may not accurately reflect economic trends. The market currently expects the Fed to cut rates twice by 2026, with a 66.5% probability of a rate cut in April.

Institutions Generally Optimistic on the Euro

Danske Bank pointed out that as the Fed enters a rate-cut cycle and the ECB remains on hold, the real interest rate differential after inflation adjustment will narrow, which is favorable for the euro. Additionally, rising attractiveness of European assets, increased risk hedging against a softening dollar, and declining confidence in US institutions all support a euro rebound.

Technical Outlook Is Optimistic

EUR/USD remains well above multiple moving averages, with short-term upward momentum present. The previous high near 1.18 constitutes an important resistance. If a downward correction occurs, the 100-day moving average around 1.165 will provide support. This week, US Q3 GDP data will be key; an upside surprise could boost the dollar and pressure EUR/USD, while a miss would be bullish for the euro.