The central bank policy shift drives currency market restructuring; can the yen's upward momentum continue? [Forex Weekly]

Weekly Market Overview

In the past week (11/24-11/28), the global currency markets showed a broad strengthening of non-USD currencies. The US Dollar Index declined by 0.72%, while the Euro rose by 0.71%, the Australian Dollar increased by 1.48%, and the British Pound gained 1.03%. Notably, the Japanese Yen also appreciated by 0.16%, indicating that shifts in central bank policy expectations have had a profound impact on exchange rates.

Shift in Federal Reserve Rate Cut Expectations Leads to Major Adjustments in Euro and US Dollar Pairs

EUR/USD climbed 0.71% over the past week, primarily driven by the market’s reassessment of the Federal Reserve’s policy direction.

US labor data continued to weaken, with core Producer Price Index (PPI) growth falling below market expectations. Several Fed officials, including Waller and Williams, issued dovish comments. According to real-time data from the CME FedWatch Tool, the market currently prices in an 87.6% chance of a rate cut at the December meeting, with only a 12.4% chance of holding rates steady.

In contrast, the European Central Bank (ECB) has signaled that its current rate hike cycle is nearing completion. A recent analysis from ING indicates that EUR/USD, currently around 1.16, could further rise to 1.17 in the short term. If geopolitical tensions ease and US economic data remain weak, the pair could even reach 1.18 before the end of the year.

On the technical side, EUR/USD has formed a “W” shaped bottom pattern, and the Relative Strength Index (RSI) shows that bullish momentum remains strong. A decisive break above the resistance at 1.1656 could open the door to further gains. Support levels are around 1.155 and 1.149.

Yen Reverses Upward, Central Bank Rate Hike Expectations as Main Driver

USD/JPY declined by 0.16% over the past week. Behind this seemingly moderate decline lies a sharp shift in market expectations—while the Fed remains dovish, the Bank of Japan (BOJ) is increasingly perceived as leaning toward tightening.

BOJ Governor Ueda Kazuo explicitly stated on December 1 that the bank will evaluate the pros and cons of a rate hike in December and make a decision accordingly. This has been interpreted as the clearest hawkish signal to date. The swap market’s pricing reflects a rising probability of a BOJ rate hike on December 19, now at 62%, nearly doubling from 30% two weeks ago.

Japanese Prime Minister Sanae Sato also warned that the government will closely monitor exchange rate movements and is prepared to take “necessary” actions to intervene in the forex market. This stance indicates a high level of concern among Japanese authorities regarding currency fluctuations.

Nomura Securities believes that as the divergence between Fed and BOJ policy expectations becomes more pronounced, the existing consolidation pattern in USD/JPY is likely to be broken, potentially marking a significant turning point for the Yen.

From a technical perspective, USD/JPY is approaching the 21-day moving average. A break below this key support could further open downside space, with the next support levels around 154 and 153. Conversely, if USD/JPY holds above the 21-day moving average, the market is likely to continue trading within a range.

Focus for This Week

Currency market participants should closely monitor the following:

For EUR/USD, observe developments in US-Russia talks and US September PCE inflation data. If geopolitical risks further diminish and inflation data continues to decline, EUR/USD is likely to rise; however, if negotiations falter or inflation data exceeds expectations, the decline could accelerate.

For Yen movements, pay attention to public statements by Japanese officials, policy outlooks in Japanese media, and US economic data releases. If market confidence in BOJ rate hikes increases further, USD/JPY could face additional downward pressure.