The US dollar interest rate hike cycle reversal signal appears! Will the EUR/JPY exchange rate turn around?

Federal Reserve Rate Cut Expectations Shift Significantly, the US Dollar Faces Depreciation Pressure

Last week, the foreign exchange market was volatile, with the US Dollar Index falling by 0.28%, and non-US currencies showing mixed performance. The euro rose by 0.46%, the Australian dollar gained 0.68%, the Japanese yen depreciated by 0.73%, and the British pound edged up by 0.08%.

The weakening of the US dollar behind this movement stems from a reassessment of the Federal Reserve’s policy stance. As US employment data showed signs of weakness and economic data was released following the end of the government shutdown, expectations for a December rate hike are changing. According to the CME FedWatch tool, the probability of the Fed cutting interest rates by 25 bps in December has fallen to 45.8%, while the chance of holding rates steady has risen to 54.2%.

This contrasts with previous signals from Fed officials who frequently adopted a hawkish tone. The market is digesting the potential extension of the rate hike cycle. The upcoming release of the September non-farm payrolls report, the October FOMC meeting minutes, and European and US PMI data this week will further influence the direction of the US dollar and other currencies.

EUR/USD Expected to Break Key Resistance

EUR/USD increased by 0.46% last week, driven largely by the US government ending the longest shutdown in history of 43 days. On November 12, US Eastern Time, Trump signed a temporary funding bill, shifting market focus to economic data.

From a technical perspective, EUR/USD has broken above the 21-day moving average but has yet to surpass the critical resistance at the 100-day moving average of 1.166. A successful breakthrough could open up broader upside potential; otherwise, a pullback risk remains, with support at the previous low of 1.146.

This week, the September non-farm payrolls report will be released on November 20; on November 26, the revised Q3 GDP and October PCE inflation data will be published. If US labor market weakness persists, it will reinforce expectations for a December rate cut, boosting EUR/USD. Conversely, unexpectedly strong employment data could dampen rate cut expectations, which would be unfavorable for the euro.

Yen Depreciation Accelerates, Economic Stimulus Plans Become Variable

USD/JPY rose by 0.73% last week, continuing to face pressure after breaking below the 155 level. Japan’s new Prime Minister, Fumio Kishida, hinted that the Bank of Japan might slow the pace of rate hikes, while markets are concerned about his fiscal policy stance.

Since Kishida’s election, the yen has depreciated significantly against the dollar, reflecting market worries over expansionary fiscal and loose monetary policies. This week, the Kishida government is expected to announce an economic stimulus package, reportedly around 17 trillion yen according to Japanese media.

Goldman Sachs warns that an unexpectedly large stimulus could reignite concerns over Japan’s fiscal discipline, pushing long-term sovereign bond yields to historic highs and continuing to depress the yen. Notably, Japanese authorities have yet to strengthen measures to curb yen depreciation; some, like Mitsubishi UFJ Morgan Stanley Securities, even believe that authorities might tolerate USD/JPY rising to around 1:161 to avoid using foreign exchange reserves for intervention.

From a technical standpoint, USD/JPY remains above multiple moving averages, with RSI indicating strong momentum. The US dollar’s advantage over the yen remains solid. The pair may test the 155 level again, opening further upside space; however, failure to break through could increase downside risks, with support at the 21-day moving average of 153.38.

This week, attention will focus on details of Japan’s economic stimulus plans and US economic data. If the stimulus exceeds expectations, USD/JPY could further rise.