December Central Bank Decision Week: Yen and Euro face major tests, where is the USD vs. EUR heading? [Forex Watch]

Last Week’s Market Overview

From December 8 to December 12, the US Dollar Index declined by 0.60%, with mixed performances among major currencies. The Euro rose by 0.84%, the British Pound increased by 0.34%, the Australian Dollar edged up by 0.18%, while the Japanese Yen fell by 0.29%.

Bank of Japan Key Meeting: Can a Rate Hike Signal Support the Yen?

Meeting Time and Expectations

On December 19, the Bank of Japan will release its interest rate decision. The market widely expects a 25 basis point hike to 0.75%, which would be a 30-year high.

The rate hike itself has become a consensus, with the real focus on Governor Ueda Kazuo’s subsequent statements. The market needs to find clues about the “neutral interest rate” to gauge the future pace of rate hikes by the central bank.

Institutional Analysis

Nomura Securities believes Ueda Kazuo may maintain a cautious stance to preserve policy flexibility. The probability of a more hawkish signal at this meeting is relatively low.

Bank of America presents two scenarios: if the central bank adopts a “dovish rate hike” stance, USD/JPY will remain high, potentially surging toward 160 early next year; if a “hawkish rate hike” occurs, it could trigger yen short covering, with USD/JPY possibly retreating to around 150, though this is less likely.

Technical Outlook

USD/JPY has broken below the 21-day moving average. If it continues to be suppressed below this level, downside risk will increase, with technical support around 153. Conversely, if it reclaims the 21-day moving average, resistance is at 158.

ECB Decision and Outlook for USD/EUR

Market Context: Fed Shift in Stance

Last week, the euro’s gains were primarily driven by the Fed’s “less hawkish” stance. The Fed cut rates by 25 basis points as scheduled and launched the Reserve Management Purchase (RMP) program, buying $40 billion of short-term government bonds monthly, which market participants interpret as a signal of QE.

Federal Reserve Chair Powell’s comments were notably dovish, exceeding market expectations. The latest dot plot indicates only one rate cut planned through 2026, contrasting sharply with market expectations of two cuts, leading to a significant decline in the dollar index over two consecutive trading days.

Key Points for ECB Meeting

On December 18, the European Central Bank will announce its latest interest rate decision. The consensus is to keep rates unchanged. The real focus will be on President Lagarde’s speech, especially the hints about future policy directions in the quarterly economic projections.

USD/EUR Outlook

Morgan Stanley suggests that amid diverging monetary policies between the US and Europe, USD/EUR could rise to 1.23 in the first quarter of 2026.

Recent US non-farm payroll data will be a turning point. If the data underperform, the dollar will remain under pressure, and EUR/USD could rise further; if it exceeds expectations, short-term downside pressure on EUR/USD is likely.

Technical Analysis

EUR/USD has stabilized above the 100-day moving average, with RSI and MACD indicators still showing bullish momentum. The next target is around 1.18, with further resistance at the previous high of 1.192.

If it pulls back after a rally, key support is near the 100-day moving average at 1.164.

This Week’s Trading Focus

The dual rate decisions from the Bank of Japan and the European Central Bank, along with the US November non-farm payroll data release, will be key factors influencing the forex market this week. The directional judgment for USD/EUR will depend on clear signals from these events. The statements from the two major central banks regarding future policy paths, especially hints about tightening pace, will directly impact the short- to medium-term trends of related currency pairs.