The yen's depreciation pressure becomes prominent, and signals of intervention by Japanese authorities emerge [Forex Watch]

Market Overview

Last week (12/15-12/19), the foreign exchange market was relatively calm, with the US dollar index rising slightly by 0.33%, and the performance of non-US currencies showing clear divergence. The Japanese yen was under the most pressure, depreciating by 1.28%; the euro fell by 0.23%, the Australian dollar declined by 0.65%, and the British pound slightly rose by 0.03%. The weekly market movements reflect exchange rate pressures caused by divergent central bank policies.

USD/JPY Touches Sensitive Levels, Policy Intervention Expectations Rise

Exchange Rate Trends Face a Turning Point

Last week, USD/JPY( rose by 1.28%, mainly driven by the Bank of Japan’s “dovish rate hike” decision. The central bank raised interest rates by 25 basis points as expected, but Governor Ueda’s remarks at the press conference were somewhat dovish, failing to boost market confidence. Coupled with the Japanese Cabinet’s approval of an 18.3 trillion yen fiscal stimulus plan, the tightening effect of policies was significantly offset, putting pressure on the yen.

Diverging Institutional Expectations, Doubts on Depreciation Space

Sumitomo Mitsui Banking Corporation’s latest forecast indicates that the Bank of Japan plans only one rate cut by 2026, with the next rate hike possibly in October, implying a slowdown in policy adjustments. The bank predicts that the yen will depreciate to around 162 in the first quarter of 2026.

However, JPMorgan issued a warning: if USD/JPY exceeds 160 in the short term, it will be regarded as a sharp move, and the risk of Japanese government intervention will significantly increase. This sets an invisible ceiling on the yen’s downside.

In contrast, Nomura Securities offers a more optimistic outlook for the yen. The institution believes that as the Federal Reserve enters a rate-cut cycle, the dollar will gradually weaken, making it difficult for the yen to continue depreciating. They expect USD/JPY to appreciate to around 155 in the first quarter of 2026.

Key Focus for This Week

The market should closely monitor Governor Ueda’s latest speeches and whether Japanese officials escalate verbal intervention. If the central bank governor adopts a hawkish stance or government intervention rhetoric intensifies, USD/JPY could face downward pressure and correction.

Technical Analysis

On the chart, USD/JPY has broken through the 21-day moving average, with MACD showing buy signals, indicating bullish momentum. Breaking through the 158 resistance level could open up more upside potential. Conversely, if the pair stalls around 158, the probability of a correction to the 154 support level will increase significantly.

Euro Weakness and Focus on Fed Rate Cut Expectations

EUR/USD Faces Resistance in Rally

Last week, EUR/USD) showed a pattern of rising then falling back, with a weekly decline of 0.23%. The European Central Bank President Lagarde maintained interest rates unchanged and did not provide the hawkish signals the market expected, putting pressure on the euro.

US economic data was mixed. November non-farm payrolls showed mixed results, and November CPI was below expectations. However, banks like Morgan Stanley and Barclays pointed out that these data are heavily distorted statistically and do not reflect the true economic trend.

Uncertainty in Fed Rate Cut Pace

According to the latest CME FedWatch tool, the market currently expects the Fed to cut rates twice in 2026, with a 66.5% probability of a rate cut in April. If this expectation changes, it will directly impact USD/JPY and other non-US currency trends.

Institutions Optimistic on Euro Mid-term Outlook

Several institutions, including Danske Bank, are optimistic about the euro’s future, citing factors such as the narrowing of real interest rate differentials between the US and Europe after inflation adjustments, European asset recovery, increased hedging demand against US dollar depreciation, and declining US policy confidence, all of which could support the euro.

Key Monitoring Points This Week

Attention should be paid to US Q3 GDP data and geopolitical developments. Better-than-expected GDP data will favor the dollar and pressure EUR/USD; worse-than-expected data will do the opposite.

Technical Position

EUR/USD remains above multiple moving averages, with short-term potential for further gains. Resistance is near the previous high of 1.18; support is at the 100-day moving average around 1.165.