Interest rate hike expectations reverse, is the US dollar exchange rate facing a new situation? [Foreign Exchange Market Observation]

Weekly Market Scan

Last week (11/10-11/14), the US dollar was under pressure, with the index down 0.28%, and non-US currencies showed mixed performance. The euro rose 0.46%, the yen weakened 0.73%, the Australian dollar gained 0.68%, and the British pound edged up 0.08%.

Market focus this week centers on the easing of rate hike expectations. Whether the Federal Reserve has room to cut rates this year will directly influence the strength of the US dollar and the movement of major currency pairs.

US Dollar at a Turning Point: Employment Data is Key

EUR/USD increased 0.46% over the week, driven by signals of a weakening US labor market and the resolution of the government shutdown crisis.

On the evening of November 12 (Eastern Time), Trump signed a temporary funding bill, ending a 43-day government shutdown, a record. After the government resumed operations, delayed economic data will be released next week, and market judgments on the rate hike cycle will be adjusted accordingly.

Key data to be released this week include the September non-farm payroll report on November 20, the third-quarter GDP revision on November 26, and October PCE inflation index. These data will directly influence the Fed’s stance on the pace of rate hikes.

If the labor market weakens further, it will reinforce expectations of a rate cut in December, weakening the dollar and supporting EUR/USD to rise. Conversely, if employment data surprises with strength, rate hike expectations will be supported, boosting the dollar and pressuring EUR/USD lower.

Current market expectations show a 45.8% chance of a 25 bps rate cut by the Fed in December, with a 54.2% chance of holding rates steady—uncertainty about rate hike expectations is rising.

Technical Highlights

EUR/USD has broken above the 21-day moving average but has yet to surpass the 100-day moving average resistance at 1.166. A breakout above this level would open up more upside potential; failure to do so could increase downside risk, with recent support at the previous low of 1.146.

This week, close attention should be paid to the US September non-farm data, October FOMC minutes, and Eurozone and US PMI data for November. The direction of rate hike expectations will be a key variable in determining EUR/USD’s future trend.

Yen Continues to Depreciate: Economic Stimulus on the Horizon

USD/JPY rose 0.73%, with the yen continuing to weaken. The policy stance of Japan’s new Prime Minister, Fumio Kishida, is the core driver—potential slowing of the BOJ’s rate hike pace and the government’s intention to implement expansionary fiscal policies are putting downward pressure on the yen.

Since Kishida took office, the yen has continued to weaken against the dollar. Markets generally worry that aggressive fiscal spending combined with loose monetary policy will further depreciate the yen.

Goldman Sachs’ latest analysis indicates that the Japanese government is preparing to launch an unexpectedly large economic stimulus package of up to 17 trillion yen, which could reignite concerns about Japan’s fiscal discipline. Such large-scale spending may push long-term sovereign bond yields to record highs and continue to suppress yen appreciation.

It is worth noting that, despite the yen’s depreciation trend, Japanese authorities have not yet taken active intervention. Mitsubishi UFJ Morgan Stanley Securities believes that to protect foreign exchange reserves, Japanese authorities might tolerate USD/JPY rising to around 161 before considering intervention.

Technical Highlights

USD/JPY remains above multiple moving averages, with RSI indicating strong bullish momentum. The pair may test the 155 level again, opening the door to higher targets. However, if 155 is broken, downside risk increases, with the 21-day moving average at 153.38 serving as support.

Focus this week on Japan’s announced economic stimulus details and US economic data. If Japan’s stimulus exceeds expectations, USD/JPY could further climb.

Market Watchpoints for This Week

Market rate hike expectations are being re-priced. US non-farm payrolls, Japanese economic stimulus, and Eurozone and US PMI data will be key drivers for the dollar’s movement and major currency pairs. The extension of the rate hike cycle will determine whether dollar strength continues.