FOMC decision imminent, USD and EUR face a major turning point

Market Dynamics Are Quietly Changing

Last week, the foreign exchange market was uneventful, with the US dollar index falling 0.50%, and non-US currencies strengthening collectively: the euro rose 0.36%, the yen gained 0.53%, the Australian dollar increased 1.36%, and the British pound appreciated 0.74%. Behind these seemingly calm data points, there is actually a market re-pricing of the Federal Reserve’s policy stance.

Strong Signals of a December Rate Cut from the Fed, Euro Rate Hike Expectations Become a Key Variable

Rising Rate Cut Expectations Weigh on the Dollar

The US November employment data showed anomalies, with ADP unexpectedly dropping 32,000 jobs, the largest decline since March 2023. Meanwhile, the September PCE Price Index continued to decline, indicating a clear easing of inflation pressures. These two data points provide ample justification for the Fed to adjust policy in December.

According to the CME FedWatch tool, the market’s probability of the Fed cutting interest rates by 25 basis points on December 10 has reached 87.2%, and expectations for rate cuts in 2026 have also increased—anticipating two more rate cuts.

Dot Plot and Powell’s Remarks Will Determine Market Direction

This week’s real focus is on the signals conveyed by the Fed’s dot plot. If the December dot plot hints at more than two rate cuts in 2026 or is accompanied by an unexpectedly large adjustment in bond purchases, the market will interpret this as dovish, putting downward pressure on the dollar and supporting euro/US dollar upside; conversely, if the dot plot shows only one rate cut in 2026 and Powell’s tone becomes more hawkish, it will be seen as a hawkish rate pause, favoring the dollar.

Technical Outlook: EUR/USD Bullish Momentum Prevails

EUR/USD has broken through the 100-day moving average, with RSI continuing to tilt upward, indicating sustained bullish momentum. Resistance levels are at 1.18 and the previous high of 1.1918; if it pulls back from these levels, support is at the 21-day moving average of 1.1593 and 1.1491.

Bank of Japan Rate Hike Probability Surges to 90%, Yen Appreciation Limited

Discrepancy Between Rate Hike Expectations and Yen Strength

BOJ Governor Kazuo Ueda’s hawkish signals, combined with the government’s tolerant stance, have pushed the market’s pricing for a December rate hike to 90%. However, surprisingly, despite high rate hike expectations, USD/JPY has hovered around 155, with yen appreciation falling far short of expectations.

The reason lies in market pessimism about the shrinking of the actual long-term real interest rate differential (nominal long-term interest rate minus CPI) between Japan and the US. Under Prime Minister Fumio Kishida’s expansionary fiscal policies, Japan’s inflation outlook is unlikely to recede quickly; at the same time, the market expects only one rate hike in Japan by 2026, which cannot effectively hedge against Fed rate cuts.

Divergence in Institutional Expectations Widening

Mizuho Securities forecasts USD/JPY reaching 158 by the end of 2026, while Nomura Securities predicts only 140—nearly an 18-point difference—highlighting high uncertainty about the yen’s outlook.

Technical Outlook: USD/JPY in Consolidation

USD/JPY has broken below the 21-day moving average. Continued suppression below this level would increase downside risk, with support at 153. Conversely, if it reclaims above the 21-day moving average, the likelihood of oscillating upward increases, with resistance at 157.

This Week’s Market Focus

• Federal Reserve Rate Decision (December 10): Dot plot data will be most critical
• Powell’s Press Conference: Tone will dominate short-term dollar direction
• Russia-Ukraine Peace Talks: Marginal impact of geopolitical premium on the euro
• Bank of Japan Signals: Confirm whether rate hike expectations align with market forecasts