Federal Reserve policy expectations reverse! Euro rate hike chances delayed, where is the currency market headed? [Forex Weekly Report]

Last Week Market Review

Last week (11/10-11/14), the US dollar index declined by 0.28%, with mixed performances among non-US currencies. The euro rose by 0.46%, the Japanese yen fell by 0.73%, the Australian dollar increased by 0.68%, and the British pound edged up by 0.08%. These fluctuations reflect a recalibration of expectations regarding global central bank policies.

Reassessment of Rate Cut Expectations Drives Euro Appreciation

Is the Federal Reserve’s December rate cut in doubt?

Last week, EUR/USD appreciated by 0.46%, driven by weaker US employment data and the reopening of the government. On November 12, Eastern Time, Trump signed a temporary funding bill, ending a 43-day government shutdown. With the government back in operation, market focus shifted to upcoming economic data releases.

Key data include the September non-farm payroll report on November 20, the third-quarter GDP revision and October PCE Price Index on November 26. Analysts note that if the US labor market softens further, it will reinforce expectations of a rate cut by the Federal Reserve in December, weakening the dollar and supporting euro appreciation. Conversely, unexpectedly strong employment data could dampen rate cut expectations, benefiting the dollar and limiting euro gains.

Federal Reserve officials have recently signaled hawkish tones, leading to a significant downward revision of December rate cut expectations. According to CME FedWatch Tool data, the probability of a 25 bps rate cut in December is currently 45.8%, while the chance of holding rates steady is 54.2%. This suggests that the Fed’s rate hike cycle may not be over, and euro rate hike expectations should be reassessed.

This Week’s Focus

• US September non-farm payroll data
• October FOMC meeting minutes
• Eurozone and US November PMI data

These data points will directly influence expectations of Fed rate cuts and the outlook for euro rate hikes.

Technical Analysis

EUR/USD has stabilized above the 21-day moving average but has yet to break through the key resistance at the 100-day moving average of 1.166. A breakout above this level could open up more room for upside, while failure to do so may lead to downside pressure, with recent support at the previous low of 1.146.

Japanese Yen Continues to Depreciate, Policy Stimulus Focus

Slowing rate hike pace weakens yen support

Last week, USD/JPY rose by 0.73%, mainly due to Japan’s new Prime Minister, Fumio Kishida, hinting that the Bank of Japan will slow its rate hike pace, coupled with market concerns over fiscal policy. Since Kishida took office, the yen has continued to depreciate, as investors worry that expansionary fiscal and loose monetary policies will persistently suppress the yen.

This week, the Japanese government will announce an economic stimulus package worth approximately 17 trillion yen. Goldman Sachs warns that if the stimulus exceeds expectations, concerns over Japan’s fiscal discipline could resurface, potentially pushing long-term sovereign bond yields to historic highs and further dampening the yen’s appreciation prospects.

It is noteworthy that, despite the Bank of Japan slowing its rate hike pace, the related intervention stance has not hardened. Mitsubishi UFJ Morgan Stanley Securities believes that, to protect foreign exchange reserves, Japanese authorities may tolerate USD/JPY testing near 161 yen per dollar.

This Week’s Focus

• Announcement of Japan’s economic stimulus plan
• US economic data developments

If the stimulus exceeds expectations, USD/JPY could further rise.

Technical Analysis

USD/JPY remains above multiple moving averages, with RSI indicating strong bullish momentum. This suggests USD/JPY may test the 155 level again, opening larger upside potential. However, failure to break through could increase downside risk, with short-term support at the 21-day moving average of 153.38.