## The Federal Reserve's Policy Shift Will Be Key: Can the Euro Buy It? [Forex Weekly Deep Analysis]

### Central bank policies are the true market indicators

Last week's forex market theme was "Dollar weakening, non-US currencies strengthening." Specifically, the US dollar index fell by 0.50%, while the euro rose by 0.36%, the Japanese yen appreciated by 0.53%, the Australian dollar surged by 1.36%, and the British pound increased by 0.74%. The driving force behind these changes is not trade data but the dramatic adjustment in central bank policy expectations.

The rising anticipation of Fed rate cuts has become the main factor suppressing the dollar. The US labor market showed anomalies—November ADP data unexpectedly declined sharply, with employment decreasing by 32,000 jobs, the largest drop since March 2023. Meanwhile, inflation pressures are easing, as reflected in the September PCE price index. The CME FedWatch tool indicates an 87.2% market expectation of a 25 basis point rate cut at the December 10 meeting, and the market also anticipates two more rate cuts by 2026.

### EUR/USD: The Dot Plot Will Determine Sustainability of the Rise

Last week, EUR/USD rose by 0.36%, but whether this rally can continue depends on the upcoming Fed "dot plot"—a document that hints at the Fed's outlook on future interest rates.

If the December dot plot shows more than two rate cuts by 2026, or if the Fed announces bond purchase plans beyond market expectations, this would be viewed as dovish, further pressuring the dollar and boosting EUR/USD. Chairman Powell's wording is another key variable—if he adopts a hawkish tone, the market may interpret it as hawkish, and the dollar could rebound.

On the technical side, EUR/USD has broken above the 100-day moving average, with RSI continuing upward, indicating strong bullish momentum. If the trend continues, resistance levels to watch are 1.18 and the previous high at 1.1918; if it pulls back, support levels are at the 21-day moving average of 1.1593 and the previous low at 1.1491.

Can the euro be bought? The answer depends on how you interpret the tone of the Fed's December meeting. If you lean dovish, there is more room for EUR/USD to rise; if you are concerned about hawkish surprises, wait for technical confirmation.

### USD/JPY: The Battle Between Rate Hike Expectations and Real Yields

The Bank of Japan's stance has undergone a dramatic shift. According to Reuters, the Japanese government has indicated it will tolerate the central bank raising interest rates, and Governor Ueda's hawkish signals have pushed market expectations of a December rate hike to 90%.

Surprisingly, USD/JPY only declined by 0.53 last week, hovering around 155, with the appreciation far below the increase in rate hike expectations. What is the logic behind this?

The key is the "real long-term interest rate differential"—the long-term interest rate minus inflation. Although the Bank of Japan is about to raise rates, Japan's inflation pressures will persist under the expansionary fiscal policies of Prime Minister Suga, and if the US cuts rates, the real interest rate gap between the two countries will not necessarily narrow. Additionally, markets expect the Bank of Japan to raise rates only once by 2026, contrasting sharply with the Fed's potential multiple rate cuts.

As a result, institutional views on the yen's outlook vary significantly. Mizuho Securities forecasts USD/JPY reaching 158 by the end of 2026, while Nomura Securities predicts 140, a difference of 18 yen. This reflects differing interpretations of US-Japan policy divergence.

On the technical side, USD/JPY has broken below the 21-day moving average. Continued pressure below this line increases downside risk, with support at 153; if it reclaims above the 21-day moving average, the probability of oscillating upward increases, with resistance at 157.

### This Week's Trading Guidance

This week's Federal Reserve meeting is a decisive event. If the rate cut outlook is interpreted as dovish, the dollar will weaken overall, with EUR/USD rising and USD/JPY falling; conversely, if hawkish signals are released, the trend will reverse. Investors should focus on the Fed's 2026 rate cut forecast in the dot plot and Powell's tone during the press conference. Ongoing coverage of the Bank of Japan's potential rate hike by Japanese media is also worth monitoring, as it could influence the subsequent direction of USD/JPY.