Yen depreciation breaks through the 158 level, can the Bank of Japan's decision reverse the downward trend? [Forex Weekly Report]

Market Cycle Review

Last week (12/15-12/19), the US dollar index rose by 0.33%, while non-US currencies showed mixed performance. The euro declined by 0.23%, the Japanese yen fell by 1.28%, the Australian dollar dropped by 0.65%, and the British pound slightly increased by 0.03%.

1. ECB signals stability policy, Fed rate cut outlook remains uncertain

Last week, EUR/USD showed a retracement from high levels, closing the week down 0.23%.

The European Central Bank announced to keep policy rates unchanged, but President Lagarde’s comments were neutral, failing to meet market expectations for a hawkish stance.

US economic data were mixed: November non-farm payrolls differed from expectations, while November CPI data were below market estimates. Institutions like Morgan Stanley and Barclays noted that these data are significantly affected by seasonal adjustments and statistical noise, making it difficult to accurately reflect the true economic trend.

Expectations for a Fed rate cut have been adjusted. Currently, the market still largely expects two rate cuts by the Fed in 2026, with a 66.5% probability priced in for a cut in April.

【CME FedWatch Tool Data】

Danske Bank and other institutions are optimistic about the euro strengthening in the medium term. Their analysis suggests that, amid the Fed beginning a rate cut cycle and the ECB remaining on hold, the real interest rate differential between the two regions, adjusted for inflation, will narrow, which is favorable for euro appreciation. Additionally, the rotation and recovery of European assets, rising demand for USD risk hedging, and investor concerns over US policy uncertainty could also support the euro.

Focus for this week: US Q3 GDP revision and geopolitical risks. If GDP exceeds expectations, it will strengthen the dollar and suppress a rebound in EUR/USD. Conversely, weaker GDP data could benefit the euro.

Technical analysis: EUR/USD is trading above multiple moving averages, with short-term potential for an upward breakout. Attention should be paid to the resistance near the 1.18 historical high. If rejected, support is seen around the 100-day moving average at 1.165.

【TradingView Technical Chart: EUR/USD Trend】

2. “Dovish rate hike” by the Bank of Japan triggers yen depreciation, government intervention risk rises

Last week, USD/JPY increased by 1.28%, mainly due to market adjustments following the Bank of Japan’s policy shift.

The BOJ raised rates by 25 basis points as scheduled, but Governor Ueda’s comments were widely interpreted as “rate hikes are not excessive,” weakening hawkish expectations for this policy move. Meanwhile, Japan’s new cabinet approved a fiscal stimulus package totaling 18.3 trillion yen, further diminishing the impact of monetary tightening.

This has put sustained downward pressure on the yen. According to Sumitomo Mitsui Banking Corporation’s forecast, if the BOJ does not tighten further in the coming months, USD/JPY could rise to 162 in Q1 2026. The yen against the RMB is also under depreciation pressure, and investors should closely monitor the linkage between Asian currencies.

The possibility of government intervention cannot be ignored. JPMorgan warns that if the yen depreciates beyond 160 in the short term, it will trigger “sharp exchange rate fluctuations,” making intervention highly likely.

However, Nomura Securities offers a different view. They believe that after the Fed’s rate cut cycle begins, the medium-term trend for the dollar will weaken, and the yen will find it difficult to continue depreciating. They forecast USD/JPY will rebound to 155 in Q1 2026.

Focus this week: Ueda’s subsequent speeches and the official verbal intervention efforts. If Ueda adopts a hawkish tone or official intervention escalates, USD/JPY could decline rapidly.

Technical analysis: USD/JPY has broken above the 21-day moving average, with MACD indicating bullish signals. If it can stay above the 158 resistance level, there is room for an upward move. If it fails below 158, downside pressure increases, with 154 as a key support level.

【TradingView Technical Chart: USD/JPY Trend】