Divergence in central bank policies triggers turbulence in the forex market! Euro and Japanese Yen face crucial decisions this week

The Two Major Central Banks Announce Decisions Simultaneously, Focus Turns to Euro Movement Analysis

This week will bring a major event in the foreign exchange market—on December 18th, the European Central Bank (ECB) will announce its interest rate decision, followed by the Bank of Japan (BOJ) on December 19th. Market expectations generally anticipate these meetings will directly impact the euro and yen exchange rates, while U.S. November non-farm payroll data will also play a key role.

Last week, the forex market was relatively calm, with the US Dollar Index down slightly by 0.60%. The euro against the dollar rose by 0.84%, the yen fell by 0.29%, the British pound increased by 0.34%, and the Australian dollar edged up by 0.18%. Behind these movements, the Federal Reserve’s policy signals remain the core driver.

Fed’s Shift in Stance Brings New Opportunities for Euro Trend Analysis

Last week, the Fed’s 25 basis point rate cut was in line with expectations, but it also announced the initiation of the Reserve Management Purchase (RMP) program, purchasing $40 billion in short-term government bonds monthly. This was widely interpreted as a return to quantitative easing. Chairman Jerome Powell’s comments were somewhat more dovish than expected, further weakening the dollar and causing the US Dollar Index to decline over consecutive days.

The latest dot plot indicates only one rate cut expected by 2026, which contrasts sharply with market bets that the Fed will cut twice next year. This divergence could widen further after the ECB meeting.

How Will the European Central Bank Respond?

The ECB is expected to keep interest rates unchanged, but investors are focusing on President Lagarde’s speech and the latest quarterly forecasts to catch signals of a potential shift toward tightening. Morgan Stanley predicts that, amid divergence in monetary policies between Europe and the US, the euro against the dollar could surge to 1.23 in the first quarter of 2026.

On the technical side, EUR/USD has stabilized above the 100-day moving average, with RSI and MACD indicators showing continued bullish momentum. The next target is around 1.18, with a key resistance near the previous high of 1.192. If the price pulls back from these highs, support levels are around 1.164, near the 100-day moving average.

If U.S. non-farm payroll data underperform this week, the dollar could weaken further, allowing EUR/USD to continue rising. Conversely, if data exceeds expectations, EUR/USD may see a short-term correction.

BOJ Rate Hike Expectations Are Imminent—Can the Yen Break Through?

Market consensus has already priced in a rate hike by the Bank of Japan. The December 19th decision is widely expected to raise rates by 25 basis points to 0.75%, the highest in thirty years. However, the rate hike itself has largely been absorbed into the market, which is now more focused on Governor Ueda’s stance on the pace of future hikes, especially his comments on the “neutral interest rate.”

The Magnitude of the Rate Hike Will Determine Yen’s Direction

Nomura Securities believes Ueda may maintain a cautious stance to preserve policy flexibility, and the likelihood of a more hawkish signal at this meeting is relatively low.

U.S. banks suggest that if the BOJ adopts a “moderate rate hike” stance, USD/JPY could be pushed up toward 160; however, if a “hawkish hike” signal is released, it could trigger yen short covering, bringing USD/JPY closer to 150—though the probability of this scenario is lower.

Technical Indicators Show Clues

USD/JPY has broken below the 21-day moving average. Continued pressure below this line would increase downside risk, with support around 153. Conversely, if it moves back above the 21-day MA, resistance is near 158.

Key Trading Notes for This Week

The market’s direction over the next week will be primarily driven by three factors: the ECB meeting, the BOJ meeting, and U.S. non-farm payroll data. The latest expectations regarding rate cuts and hikes from these central banks will be critical variables in determining EUR/JPY exchange rate movements.

Investors should closely monitor the language and forward guidance from these central bank officials, as well as whether the non-farm payroll data meets market expectations. These signals will directly influence investor perceptions of the divergence in global monetary policies and thus impact this week’s forex performance.