Central Bank Decision Week is Coming! The Fate of the Euro and Yen

This week’s forex market features two major central bank meetings—the European Central Bank and the Bank of Japan will announce interest rate decisions successively, leading to heightened market alertness. Although the US dollar retreated against the euro last week, this scene is about to change, and the forex market will experience intense fluctuations around the policy stances of the two central banks.

Diverging Central Bank Policies Intensify, USD/EUR Faces Critical Choice

The Federal Reserve cut interest rates by 25 basis points as expected last week, but the lack of a hawkish stance instead pressured the dollar. The Fed announced the launch of a reserve management purchase program, injecting $40 billion per month into short-term government bonds, which is interpreted as a signal of a new round of quantitative easing. Meanwhile, Chairman Powell’s remarks leaned towards dovishness, causing the US dollar index to fall sharply by 0.60%, while the euro rose by 0.84%.

The latest dot plot signals surprised many—only one rate cut is planned for 2026, far below market expectations of two cuts. This misalignment in policy guidance is rewriting market perceptions of the Fed’s future path.

On December 18, the European Central Bank will release its latest decision. The mainstream market opinion expects rates to remain unchanged, but the real focus is on President Lagarde’s speech and the latest quarterly forecasts. Investors are carefully analyzing these statements to gauge when the ECB might adjust its policy stance. The subsequent direction of USD/EUR depends on the strength of signals from this meeting.

Morgan Stanley’s latest forecast indicates that amid increasing divergence in US and European monetary policies, USD/EUR could rise to 1.23 in the first quarter of 2026. This suggests the market is re-pricing the relative value of the two major currencies.

US November non-farm payroll data this week should not be overlooked. Weak data would continue to pressure the dollar, potentially pushing USD/EUR higher. Conversely, strong data could trigger short-term corrections.

From a technical perspective, EUR/USD has broken through the 100-day moving average, with RSI and MACD indicators both showing bullish dominance. The next target is around 1.18, and a break above the previous high of 1.192 would serve as a new directional signal. If prices pull back after rising, support is expected near the 100-day moving average at 1.164.

Bank of Japan Rate Hike: Can Yen Break Through the Impasse?

On December 19, the Bank of Japan will announce its new interest rate decision. The market consensus is that it will raise rates by 25 basis points to 0.75%, creating a 30-year high.

However, rate hikes are already largely priced in, and market attention has shifted to Governor Ueda’s tone regarding future rate hike pace, especially how he interprets the key concept of “neutral interest rate.” Nomura Securities believes Ueda may maintain a cautious tone to preserve policy flexibility, making it unlikely to signal an unexpectedly hawkish rate hike or a higher terminal rate.

This directly impacts USD/JPY movement. If the BOJ adopts a “dovish rate hike” stance, USD/JPY could remain high or even push towards 160, maintaining the dollar’s advantage over the yen. If a “hawkish rate hike” signal is issued, short-sellers of the yen may close positions, and USD/JPY could fall toward 150. However, the industry generally considers the latter less likely.

Technically, USD/JPY has broken below the 21-day moving average. If this moving average continues to suppress the price, downside potential opens, with 153 as a key support level. Conversely, if the price reclaims the 21-day moving average, resistance is seen at 158.

Market Outlook for This Week

The dual decisions from the European Central Bank and the Bank of Japan will dominate this week’s forex rhythm. Statements on policy outlooks and the US non-farm payroll data will jointly determine the direction of major currency pairs like USD/EUR and USD/JPY. Market participants should pay close attention to the language used by the central bank governors regarding policy flexibility and terminal rates, as these expressions often have more impact than the decisions themselves.