Yen depreciation acceleration warning! Central bank policy intervention window approaching [Forex Weekly Review]

Last Week’s Market Summary

Last week (12/15-12/19), the US dollar index experienced a modest rally, rising 0.33%, while non-US currencies showed mixed performance. The Japanese yen was under the most pressure, depreciating 1.28% over the week; the euro declined by 0.23%, the Australian dollar by 0.65%, and the British pound edged up slightly by 0.03%. Factors such as divergent central bank policies, economic data exceeding expectations, and technical breakthroughs contributed to increased market volatility.

Yen Approaching Key Psychological Level, Intervention Signals Frequent

The USD/JPY exchange rate rose 1.28% last week, mainly driven by the Bank of Japan’s “dovish stance on rate hikes.” Although the BOJ raised interest rates by 25 basis points as expected, Governor Ueda’s comments were notably dovish, disappointing the market. More critically, Japan’s new cabinet approved a fiscal stimulus package totaling 18.3 trillion yen, which directly offset the tightening effect of the rate hike, further pressuring the yen.

The market generally expects the BOJ to cut rates only once by 2026. Sumitomo Mitsui Banking Corporation’s more pessimistic forecast predicts the next rate hike will be delayed until October 2026, with the USD/JPY potentially reaching 162 in the first quarter.

However, JPMorgan issued a key warning: If the yen depreciates beyond 160 and cannot be effectively controlled in the short term, the Japanese government is highly likely to intervene in the currency market. This statement has sounded an alarm for the market. In contrast, Nomura Securities holds a more optimistic view, believing that under the backdrop of Fed rate cuts, the dollar will ultimately struggle to strengthen further, with the yen possibly appreciating to 155 in the first quarter.

On the technical side, USD/JPY has broken above the 21-day moving average, and the MACD has shown a buy signal. Once it breaks through the 158 resistance level, a larger upward move could be triggered. However, if it remains under pressure below 158, the risk of a pullback increases, with support at 154.

This week’s focus: The Bank of Japan governor’s speeches and government verbal intervention signals will be key. Any hawkish comments or escalation of intervention could trigger a rapid correction in USD/JPY.

Euro Rises Then Falls, Fed Rate Cut Expectations in 2026 Still Unclear

The EUR/USD exchange rate last week first rose then fell, ending down 0.23%. The European Central Bank kept interest rates unchanged as expected, but President Lagarde failed to deliver the hawkish signals the market had anticipated, leading to disappointment.

US economic data showed mixed signals. November non-farm payrolls were weaker than expected, while CPI data for the same period was below forecasts. Major investment banks like Morgan Stanley and Barclays later pointed out that these data might be heavily distorted by statistical and technical factors, making it difficult to accurately reflect the true state of the economy. This uncertainty in data interpretation has deepened market speculation about the Fed’s policy path.

Currently, the market’s expectations for a rate cut by the Fed in 2026 remain relatively stable—anticipating two cuts throughout the year, with a 66.5% probability of a cut in April. However, market reactions suggest this outlook still has considerable uncertainty.

Danske Bank offers a more constructive analysis. The bank believes that since the Fed leans toward rate cuts while the ECB remains neutral, the real interest rate differential after inflation adjustment may narrow in the medium term, supporting the euro. Coupled with the recovery of European asset markets, risk aversion impacting the dollar, and waning US institutional confidence, the euro has significant upside potential.

On the technical front, the EUR/USD pair continues to trade above multiple moving averages, with short-term momentum still bullish. The previous high around 1.18 is a key resistance; if it pulls back, the 100-day moving average at 1.165 provides support.

This week’s focus: US Q3 GDP data and geopolitical developments. Better-than-expected GDP will favor the dollar and pressure the euro; otherwise, the euro could strengthen.

AUD and Global Liquidity Environment

Although the Australian dollar fell 0.65% last week, attention should also be paid to the AUD/CNY exchange rate. As a commodity currency, the AUD’s movements are closely linked to global risk appetite and commodity prices. In the context of the Fed’s rate cut cycle and a weakening dollar index, the AUD faces long-term upward pressure against the CNY. In the short term, the relative strength of the AUD against the CNY will serve as an important indicator of liquidity and trade prospects in the Asia-Pacific region.

Outlook for This Week

The forex market enters a critical decision-making window. The willingness of the Japanese government to intervene, the true implications of US economic data, and the sustainability of Europe’s recovery will determine currency trends in the coming week. Investors should closely monitor central bank speeches and officials’ statements, which often have a greater market impact than the data itself.