The Japanese Yen makes a big turnaround! The central bank is on the verge of raising interest rates, and market expectations are rapidly shifting.

Weekly Market Summary

Last week (11/24-11/28), the US dollar index weakened, declining by 0.72%, with non-USD currencies rebounding collectively. The Australian dollar led the rally with a 1.48% increase, the British pound rose by 1.03%, and the euro gained 0.71%. Although the Japanese yen only slightly appreciated by 0.16%, it implied a deeper shift in policy expectations.

Fed Doves Reinforced, Euro and US Dollar Exchange Rates React Accordingly

Last week, EUR/USD rose by 0.71%, driven primarily by the rapid increase in expectations for a Federal Reserve rate cut. Signs of a weakening US labor market became evident, with core PPI growth falling short of expectations. Fed policymakers such as Waller and Williams signaled dovish stances, igniting market hopes for easing policies.

According to the CME FedWatch Tool, the market currently prices in an 87.6% chance of a rate cut in December, with only a 12.4% chance of no cut. Meanwhile, the interest rate market reveals a different story — the European Central Bank’s rate hike cycle appears to have concluded, and divergence in policy paths between the two major central banks is pushing the euro higher.

ING predicts that EUR/USD could short-term rise from the current 1.16 level to 1.17, and if geopolitical risks ease and US data continues to show weakness, it could even surge to 1.18 before year-end.

From a technical perspective, EUR/USD is forming a “W” bottom pattern. The Relative Strength Index (RSI) indicates that bullish momentum remains intact. Breaking above the resistance at 1.1656 could open the door for further gains. Conversely, if the pair is capped by the 100-day moving average, support levels can be set at 1.155 and 1.149.

Yen Reversal Becomes Focus, Rate Hike Expectations Surge

The Japanese yen’s performance this week warrants close attention. USD/JPY declined by 0.16% last week, but behind this seemingly calm figure lies a market expectation of significant shifts — both the Fed’s rate cut prospects and the Bank of Japan’s rate hike expectations are rising, providing strong support for the yen.

Japanese Prime Minister Suga Yoshihide recently stated that the government will closely monitor exchange rate fluctuations and be prepared to intervene in the foreign exchange market if necessary. This comment immediately heightened market alertness toward potential official Japanese intervention. Even more significant was the statement by Bank of Japan Governor Ueda Kazuo on December 1, who explicitly said that the BOJ will weigh the pros and cons of a December rate hike and make an appropriate decision — the most hawkish stance from the central bank to date.

The swap market’s forecast is even more direct: the probability of the BOJ raising rates at the December 19 decision meeting is about 62%, more than double the 30% from two weeks ago. Nomura Securities notes that as divergence in policy expectations between Japan and the US becomes more apparent, the long-term consolidation pattern of USD/JPY may be broken, and the yen could face a major turning point.

On the technical side, USD/JPY is approaching a critical level at the 21-day moving average. A break below this line could activate downward momentum, with support levels at 154 and 153. However, if the pair holds this line, it is more likely to fluctuate within a range.

Key Focus for This Week

Investors should closely monitor the latest speeches from Japanese officials and upcoming US economic data. If expectations for a BOJ rate hike strengthen further, USD/JPY may continue to find a bottom. Meanwhile, progress in US-Russia negotiations and the trajectory of US September PCE data will influence the direction of EUR/USD — if negotiations proceed smoothly and inflation continues to decline, the euro and dollar are likely to extend their upward trend.