Forex Weekly Shock Report: Yen Faces Pressure, Can the Euro Continue Its Rally?

Last Week Market Recap

In the past week (December 22 to 26), non-USD currencies collectively strengthened, with the US Dollar Index falling by 0.67%. The standout performer was the Australian dollar, which rose by 1.63%, followed by the British pound with an increase of 0.88%, while the Japanese yen and euro also gained 0.74% and 0.52% respectively. What signals are behind this rebound? Let’s analyze them one by one.

Can the Euro Break Through the Ceiling? Federal Reserve Policy Expectations Are Key

Short-term Resistance, Long-term Divergence

Last week, EUR/USD briefly touched 1.1808, the highest in nearly three months, before closing up by 0.52%. But can this rally continue?

The main support for this rebound is the weakening of the US dollar. US Q3 GDP growth reached 4.3%, far exceeding market expectations, but this data is a lagging indicator. The market is more focused on the current employment situation. The CME FedWatch tool shows that investors generally expect a 62.9% chance of the Federal Reserve starting rate cuts in April next year, with two more cuts expected within 2026. The rising rate cut expectations directly benefit non-USD currencies, giving the euro support.

What’s the Outlook for 2026? Morgan Stanley Offers a “Rise then Fall” Scenario

Driven by the Fed’s rate cut cycle, Morgan Stanley forecasts EUR/USD to rise to 1.23 in the first half of 2026, with an optimistic scenario possibly pushing it to 1.30. However, the turning point is expected in the second half— as European economic fundamentals weaken again, while the US economy remains resilient, EUR/USD is likely to fall back to 1.16.

This suggests 2026 will be a “rollercoaster” year for euro traders.

Key Technical Points This Week

1.18 is the current resistance level. If EUR/USD cannot effectively break through this key point this week, it may face downside pressure, with support near the 21-day moving average at 1.17. Conversely, a break and hold above 1.18 could open up more upside, with the next resistance at 1.186.

Data to Watch

This week, the release of the Federal Reserve meeting minutes is crucial for assessing whether rate cut expectations will further intensify. Additionally, December PMI data from the US and Eurozone should not be overlooked—strong PMI figures could weaken the case for rate cuts.

Yen Dilemma: Intervention or Just “A Drop in the Ocean”

Official Statements Signal Support, Yen Short-term Support

Last week, USD/JPY fell by 0.74%, driven mainly by two factors: first, the overall weakness of the US dollar index; second, rising expectations of Japanese government intervention.

On December 22, Japanese Finance Minister Shunichi Suzuki explicitly stated that recent sharp yen fluctuations are not due to economic fundamentals but are typical speculative behaviors. He further indicated that the Japanese government has the right to take necessary measures to intervene. This statement immediately caused a reaction in the forex market, providing short-term support for the yen.

But the Question Is: Can Intervention Truly Reverse the Depreciation?

Major institutions like JPMorgan Chase and BNP Paribas give a pessimistic answer: the US-Japan interest rate differential remains at a historic high, and Japan’s real interest rates are negative. These two factors will continue to push USD/JPY higher. The market consensus is that, without aggressive rate hikes from the Bank of Japan, purely market-based interventions are unlikely to reverse the structural yen depreciation trend.

Overnight index swap contracts indicate that investors expect the Bank of Japan to raise rates again only in the second half of 2026, which undoubtedly adds pressure on the yen.

Risk of USD/JPY Breaking 160 Should Not Be Underestimated

Analysts at JPMorgan and BNP Paribas generally expect USD/JPY to potentially break through the 160 psychological level in 2026. Once broken, it would mark a new phase of yen depreciation.

Technical and Strategy for This Week

USD/JPY is currently above the 21-day moving average. As long as this level holds, there is still potential for oscillating upward, with resistance at 158. However, if it falls below the 21-day MA, the next support is near the previous low of 154.3.

Due to the risk of intervention, the upside potential for USD/JPY may be limited. This week, focus on US data and Japanese officials’ statements—any hawkish signals could trigger a new round of buying.

Summary: What Is the Market Waiting For?

Whether the market remains calm or volatile this week largely depends on the direction of the Federal Reserve’s policy expectations. The next moves of currencies like the euro and yen will ultimately hinge on whether the Fed’s meeting minutes continue to support rate cut expectations. Meanwhile, the risk of Japanese government intervention remains ever-present, and any new official statements could trigger rapid adjustments.

For traders, this is a “data-driven” trading week, making risk management especially important.