The divergence of USD and EUR exchange rates intensifies! The risk of yen depreciation sharply rises, and signals of central bank intervention emerge.

Weekly Market Overview

Last week, the US dollar index edged higher by 0.33%, but performance among non-US currencies was mixed. The euro against the dollar declined by 0.23%, the yen depreciated most sharply by 1.28%, the Australian dollar fell by 0.65%, and only the British pound rose slightly by 0.03%. The USD/EUR exchange rate showed weak oscillation, while USD/JPY continued to climb, with market focus clearly shifting toward the yen.

Euro Under Pressure, Rate Cut Expectations as a Key Variable

Last week, EUR/USD experienced a rise followed by a decline, ultimately closing down 0.23%. The European Central Bank (ECB) held steady as expected, maintaining its interest rate policy unchanged, but President Lagarde did not signal the hawkish stance markets anticipated during the press conference, leading to some disappointment.

US economic data was mixed. November non-farm payrolls performed moderately, and November CPI data came in below expectations. Many investment banks, including Morgan Stanley and Barclays, pointed out that these figures were heavily distorted by seasonal factors and statistical volatility, making it difficult to accurately reflect the true state of the economy.

Regarding rate cut expectations, the market currently anticipates the Federal Reserve will cut rates twice by 2026, with about a 66.5% probability of a cut in April. These expectations support the relative attractiveness of European assets compared to the dollar.

Institutions like Danske Bank believe that, due to the Fed being in a rate-cut cycle and the ECB maintaining rates, the real interest rate differential after inflation adjustment may narrow, which is favorable for the USD/EUR exchange rate. Meanwhile, signs of European economic recovery, risk aversion regarding dollar weakness, and cautious US policy outlooks could also boost the euro.

Yen Hit by “Dovish Rate Hike,” Depreciation Approaching Key Level

Last week, USD/JPY rose by 1.28%, with depreciation pressures intensifying. The Bank of Japan (BOJ) raised interest rates by 25 basis points as expected, but Governor Ueda’s dovish remarks sharply contrasted with market expectations of a hawkish guidance.

Adding to the pressure, Japan’s newly formed cabinet approved a fiscal stimulus package totaling 18.3 trillion yen, which directly undermines the tightening effect of the rate hike. Under this heavy pressure, the yen’s depreciation momentum remains difficult to halt.

Market expectations for the BOJ’s next move have also lowered. Currently, it is expected that the BOJ will only cut rates once in 2026, with Sumitomo Mitsui Banking Corporation even estimating that the next rate hike might not occur until October 2026, implying the yen could remain under pressure for a considerable period. The bank forecasts USD/JPY could fall to around 162 in Q1 2026.

However, JPMorgan has issued a warning. The bank believes that if the yen depreciates past the 160 level in the short term, it will be considered an abnormal fluctuation, significantly increasing the risk of government intervention. This introduces uncertainty for the future market.

Nomura Securities holds a different view, believing that after the Fed begins its rate cut cycle, the dollar will struggle to remain strong, and the yen will eventually reverse its downward trend. The firm predicts USD/JPY could appreciate to around 155 in Q1 2026.

Technical Indicators Signal Risks, Key Levels as Focus

From a technical perspective on USD/JPY, the price has broken above the 21-day moving average, and the MACD indicator still shows strong buy signals. If the price can successfully break through the 158 resistance level, the USD/JPY could continue its upward trend, opening more space for gains. However, if it faces resistance around 158, the risk of a pullback increases, with initial support seen at 154.

Next Week’s Focus and Trading Insights

Investors should monitor US Q3 GDP data and geopolitical developments. Better-than-expected GDP could continue to pressure the USD/EUR exchange rate downward; otherwise, it could be supportive of the dollar.

Additionally, closely follow the latest comments from BOJ Governor Ueda and whether Japanese authorities escalate verbal interventions. If hawkish signals or intervention risks increase, USD/JPY could face downward pressure. The market’s likelihood of actual intervention by the Japanese government is also rising, which could become a key variable during the week.