The central bank decision week is approaching, and these three major currency pairs could trigger a market surge!

2025-12-25 00:02:51

Policy Turning Point at the Crossroads

This week will feature two major central bank meetings— the European Central Bank on December 18 and the Bank of Japan on December 19— followed by the release of US non-farm payroll data, which will become key triggers for the forex market.

Looking at last week’s market movements, the US dollar index fell by 0.60%, the euro appreciated by 0.84%, and the Japanese yen depreciated by 0.29%. This seemingly contradictory trend reflects the complex market expectations and negotiations regarding the policies of various central banks.

ECB Meeting: Can the Euro Maintain Its Strength?

The policy direction of the ECB is becoming the decisive factor for EUR/USD movement. Last week, EUR/USD rose significantly, mainly driven by the Fed’s 25 basis point rate cut and the market’s continued expectation of dollar decline. The Fed’s asset purchase program (buying $40 billion of short-term government bonds monthly) was interpreted as a QE signal, exerting downward pressure on the dollar.

The key question is: can the ECB continue to support the euro? While the market generally expects the ECB to keep rates unchanged, the speech content of President Lagarde is crucial. Analysts suggest that if the ECB signals tightening, the euro could further appreciate. Morgan Stanley forecasts that, amid increasing policy divergence, EUR/USD could surge to 1.23 in the first quarter of 2026.

On the technical side, EUR/USD has stabilized above the 100-day moving average, with a clear bullish signal. If US November non-farm payroll data underperform expectations, EUR/USD could continue to rise, with the next target at 1.18, and resistance near 1.192 after a breakout. Conversely, if the non-farm data exceeds expectations, a short-term correction to around 1.164 near the 100-day moving average is possible.

It is also noteworthy that many traders are watching the EUR/CNY exchange rate. In an environment of euro strength, converting euros to RMB may also present opportunities.

Bank of Japan Rate Hike: Can the Yen Reverse Its Downtrend?

The BOJ will announce its rate decision this week, with market expectations of a 25 basis point hike to 0.75%— the highest rate in 30 years. However, this rate hike has already been largely priced in, and the focus is on Ueda and Kuroda’s signals regarding future rate hikes.

Nomura Securities believes Ueda and Kuroda are likely to remain ambiguous about the “neutral interest rate” to maintain policy flexibility. In other words, this hike may be dovish in nature— seeming to tighten but actually signaling easing. If this “dovish hike” occurs, USD/JPY could continue to trade at high levels, possibly pushing toward 160.

On the other hand, if the BOJ signals a hawkish stance, implying faster future rate hikes, it could trigger short covering of the yen, and USD/JPY might fall toward 150. However, this scenario is less likely.

On the technical side, USD/JPY has broken below the 21-day moving average. Continued pressure below this level increases the likelihood of further decline, with support around 153. If it reclaims the 21-day moving average, resistance is near 158.

Market Outlook for This Week

There are three key variables this week:

ECB Meeting Direction: Directly influences EUR/USD and could lead to a broad strengthening of euro-related currencies.
BOJ Rate Hike Stance: Determines whether USD/JPY can sustain high levels.
US Non-Farm Payroll Data: As a “black swan,” an unexpected strong report could heavily weaken the dollar, benefiting euro and yen.

Currently, the market is in a period of policy divergence— the Fed is easing, the BOJ is raising rates, and the ECB may be on hold. This misalignment offers trading opportunities across major currency pairs, but also increases risks.

Investors are advised to closely monitor the wording of the central bank speeches and the actual US non-farm payroll figures, as these will directly influence the main trend of the forex market next week.

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