The upcoming central bank decision week, Euro and Yen currencies face a critical turning point!

Last Week’s Foreign Exchange Market Volatility Review

Last week (December 8 to December 12), the US Dollar Index declined by 0.60%, with mixed performances among major currencies. The euro appreciated by 0.84%, the British pound rose by 0.34%, the Australian dollar increased slightly by 0.18%, while the Japanese yen fell by 0.29%. Behind this currency fluctuation, it reflects the re-pricing of global central bank policy expectations, which also indirectly influenced the direction of other currency pairs such as USD/CNY.

Fed “Liquidity” Signal Boosts Euro, ECB Meeting Becomes Next Week’s Focus

Core Drivers Behind the Euro’s Rise

EUR/USD rose by 0.84% last week, mainly driven by the dovish signals from the Federal Reserve. The Fed cut interest rates by 25 basis points as expected and announced the launch of the Reserve Management Purchase (RMP) program, purchasing $40 billion worth of short-term government bonds monthly, widely interpreted by the market as a reprise of QE. Fed Chair Powell’s speech also carried a dovish tone, and this dual factor led to a sharp decline in the US Dollar Index for two consecutive trading days.

It is noteworthy that the latest dot plot shows only one rate cut planned for 2026, but the current market logic is that the Fed will implement two rate cuts next year. This divergence in expectations could become a disruptive factor for subsequent market trends.

Can the ECB Decision This Week Continue to Boost the Euro?

On December 18, the European Central Bank will announce its latest interest rate decision. The consensus is that the ECB will keep rates unchanged, with the real focus on President Lagarde’s speech and the quarterly forecast update. Investors hope to find clues in these signals about when the ECB might shift towards tightening policy.

Morgan Stanley believes that, amid increasing divergence between US and European monetary policies, EUR/USD could reach 1.23 in the first quarter of 2026.

Technical and Outlook

EUR/USD has stabilized above the 100-day moving average, with momentum indicators like RSI and MACD signaling that the bullish trend remains strong. The next upward target is around 1.18; if successfully broken, resistance levels are near the previous high of 1.192. Conversely, if a pullback is hindered, support is near the 100-day moving average at around 1.164.

Bank of Japan Rate Hike Imminent, Yen Volatility May Subside

Rate Hike Expectations Priced In, Focus on Policy Path Signals

USD/JPY rose slightly by 0.29% last week, with the market remaining cautious about the Bank of Japan’s 2026 rate hike plans. The BOJ’s latest rate decision will be announced on December 19, with expectations of a 25 basis point increase, raising the policy rate to 0.75%, the highest in 30 years.

Since the rate hike itself has been largely priced in, the focus quickly shifted to Governor Ueda Shinichi’s guidance on future rate hikes, especially his stance on the key concept of “neutral interest rate.”

Rate Hike Outlook: More Likely to Be Dovish

Nomura Securities believes Ueda Shinichi is inclined to keep language vague on the neutral interest rate to maintain policy flexibility. Therefore, the likelihood of the upcoming meeting signaling a hawkish rate hike beyond market expectations is relatively low.

Bank of America points out that if the BOJ adopts a “dovish rate hike” stance, USD/JPY will remain high and may even challenge the psychological level of 160 early next year. However, if the BOJ shifts to a “hawkish rate hike,” it could trigger short covering in the yen, pushing USD/JPY back toward 150. The probability of this scenario is relatively small.

Key Technical Support Levels

USD/JPY has broken below the 21-day moving average. Continued pressure below this level increases the likelihood of further decline, with key support around 153. Conversely, reclaiming above the 21-day moving average would open resistance near 158.

Key Focus for This Week

• December 18: ECB interest rate decision and Lagarde’s speech
• December 19: BOJ interest rate decision and Ueda Shinichi press conference
• Later this week: US November Non-Farm Payrolls data

Non-farm payroll data is crucial. If the data underperforms expectations, the dollar could weaken further, and EUR/USD may rise further. Conversely, if the data exceeds expectations, EUR/USD could face short-term correction. Meanwhile, the policy directions of the ECB and BOJ, along with market re-pricing of future rate hikes or cuts, will profoundly influence these currency pairs’ medium-term trends and also impact broader forex market patterns such as USD/CNY.