The yen continues to face increased depreciation pressure. How is the intervention risk priced? [Forex Weekly Review]

Market Overview Scan

Last week (12/15-12/19), the US dollar index rose slightly by 0.33%, with notable divergence among non-US currencies. The Japanese yen fell the most by 1.28%, the euro declined by 0.23%, the Australian dollar dropped by 0.65%, and the British pound remained nearly flat with a slight increase of 0.03%.

Against the backdrop of a sharp depreciation of the yen, the USD/JPY exchange rate also came under pressure, bringing tangible impacts on cross-border trade and capital flows in the Asia-Pacific region.

Yen’s Rapid Decline, Is Government Intervention Imminent?

USD/JPY surged toward the 158 level this week

Last week, USD/JPY increased by 1.28%, approaching the critical resistance level of 158. The driving force behind this was the Bank of Japan’s “dovish rate hike.” Although the BOJ raised interest rates by 25 basis points as scheduled, Governor Ueda Kazuo’s tone was somewhat dovish, disappointing the market. To make matters worse, Japan’s new cabinet approved a fiscal stimulus package totaling 18.3 trillion yen, which directly offset the tightening effect of the rate hike.

The market expects the BOJ to cut interest rates only once by 2026. Analysts at Sumitomo Mitsui Banking Corporation suggest that the next rate hike might not occur until October 2026, which is still a long way off. Before that, the bank forecasts USD/JPY could surge to 162 in the first quarter of 2026, and the yen against the RMB will also come under pressure.

Where is the intervention threshold?

The key question is: When will the Japanese government intervene? Research from JPMorgan indicates that if USD/JPY exceeds 160 in the short term, it will be perceived by the market as abnormal exchange rate volatility, significantly increasing the likelihood of intervention by Japanese authorities.

However, Nomura Securities offers a different perspective. They believe that with the Federal Reserve entering a rate-cut cycle, the long-term weakening trend of the dollar is already set, and the yen may not continue to depreciate. Nomura’s more optimistic forecast suggests that in the first quarter of 2026, the yen could strengthen to 155, thereby also supporting the RMB against the yen.

Two major points to watch next week

This week, market focus will be on two aspects: the public statements of BOJ Governor Ueda Kazuo and the potential verbal intervention signals from Japan’s authorities. If Ueda signals a more hawkish stance or if the Ministry of Finance escalates its intervention rhetoric, USD/JPY is likely to retreat from recent highs.

From a technical perspective, USD/JPY has broken above the 21-day moving average, and the MACD indicator has turned bullish. After breaking through the 158 resistance level, there is more room for upward movement. However, if it gets stuck below 158 and cannot break through, the probability of a pullback to the 154 support level will increase.

Euro at a Crossroads

Focus on the Fed’s rate cut pace

EUR/USD fluctuated last week, ending with a decline of 0.23%. The European Central Bank’s decision to keep interest rates unchanged was in line with expectations, but President Lagarde did not signal the hawkish stance that markets had been eagerly awaiting, disappointing bullish traders.

US economic data showed mixed signals. November non-farm payrolls were moderate, and the November CPI was below expectations. Major banks like Morgan Stanley and Barclays warn that these data may be heavily influenced by technical factors and statistical noise, and may not accurately reflect the true economic trend.

Currently, markets expect the Fed to cut rates twice by 2026, with a 66.5% probability of a rate cut in April.

Reasons for a potential rebound in the euro

Danish bank Danske Bank believes that the narrowing of the interest rate differential, due to the Fed starting to cut rates while the ECB remains on hold, provides support for the euro. The real interest rate differential, after inflation adjustment, will further narrow, which is an intrinsic logic supporting euro strength.

Additionally, the recovery of European assets, increased hedging against dollar weakness, and declining investor confidence in US policies could all push the euro higher.

What to watch this week

Key data is the US Q3 GDP. If GDP exceeds expectations, the dollar will be supported, and EUR/USD may come under pressure. Conversely, weaker GDP data would be positive for the euro.

From the charts, EUR/USD remains above multiple moving averages, with short-term potential to challenge the previous high near 1.18. If it pulls back, the 100-day moving average at 1.165 is a solid support level.

Market Weekly Report Reminder

The directions of the yen and euro point to the same core question: How many times will the Fed cut rates by 2026? The answer will profoundly influence the USD/RMB, EUR/USD, and the overall forex market direction. Monitoring central bank speeches and economic data is key to grasping the trend.