On the eve of the Bank of Japan and European Central Bank interest rate decisions, the forex market is volatile! 【This week's Forex Focus】

Last Week’s Market Scan

Over the past week (December 8 to December 12), the US dollar index declined by 0.60 under pressure, while non-USD currencies showed mixed performance. Specifically, the euro led the gains with an increase of 0.84%, the British pound rose by 0.34%, the Australian dollar edged up by 0.18%, and the Japanese yen fell by 0.29% under selling pressure.

Bank of Japan Rate Hike Approaching, When Will the Yen Turn Around?

This week, on December 19, the Bank of Japan will announce a key interest rate decision. The market widely expects the central bank to initiate a new round of rate hikes, raising the benchmark rate by 25 basis points to 0.75%, reaching a 30-year high.

From a technical perspective, USD/JPY showed a bullish trend last week, rising by 0.29%. This reflects market caution regarding the BOJ’s rate hike path. Since expectations of rate hikes are already priced in, investors’ focus has shifted to Governor Ueda’s guidance on the future pace of rate increases and the “neutral interest rate.”

Nomura Securities’ view is noteworthy—they believe Ueda tends to be vague about the rate hike path to maintain policy flexibility. Therefore, this meeting is unlikely to exceed market expectations or signal a more hawkish stance.

Bank of America’s analysis indicates that if the BOJ adopts a “dovish rate hike” stance, USD/JPY could remain high and potentially push toward 160 at the start of the year. Conversely, a “hawkish rate hike” could trigger yen short covering, pushing the exchange rate closer to 150, though this scenario is less likely.

Technical Analysis: USD/JPY has broken below the 21-day moving average. If the downtrend continues, the decline could accelerate, with recent support at 153. If it rebounds and moves back above the moving average, resistance is seen at 158.

ECB Meeting Approaching, Euro’s Future Movement Will Impact the Global Market

Last week, EUR/USD gained 0.84%, mainly driven by the Fed’s “dovish” signals.

The Federal Reserve cut interest rates by 25 basis points as expected and announced the initiation of the Reserve Management Purchase (RMP) program, purchasing $40 billion in short-term government bonds monthly, which markets interpret as a form of quantitative easing. Additionally, Chairman Powell’s comments conveyed a more dovish tone than expected, weakening the dollar over two consecutive trading days. Notably, the latest dot plot suggests only one rate cut opportunity in 2026, but markets still price in two rate cuts this year.

On December 18, the European Central Bank will release its interest rate decision. The market expects rates to remain unchanged, with focus on President Lagarde’s speech and quarterly forecasts for clues on future policy shifts. Morgan Stanley predicts that amid diverging monetary policies between Europe and the US, EUR/USD could rise to 1.23 in the first quarter of 2026.

Technical Performance: EUR/USD has broken above the 100-day moving average, with RSI and MACD indicators showing sustained bullish momentum. The next target is 1.18; if broken, resistance shifts to the previous high of 1.192. If it pulls back after a rally, support is seen near the 100-day moving average at 1.164.

Key Highlights This Week

• Bank of Japan Meeting (December 19): Focus on whether rate hikes meet expectations and Ueda’s comments on future rate hike pace
• ECB Meeting (December 18): Lagarde’s speech and quarterly forecasts will be key indicators for euro’s future direction
• US November Non-Farm Payrolls: Weak data would continue to weaken the dollar and boost the euro; strong data could cause short-term pressure

With two central bank meetings and important economic data, forex market volatility may increase this week. Investors should closely monitor policy developments and data releases.