Foreign exchange market movements: Australian dollar leads the rally, Japanese yen forecast becomes the focus again [Weekly Report Analysis]

Last Week Market Overview

Last week, the US Dollar Index declined by 0.67%, while non-USD currencies generally appreciated. Among them, the Australian Dollar performed the best with a rise of 1.63%, followed by the Japanese Yen up 0.74%, the British Pound up 0.88%, and the Euro up 0.52%.

The Logic Behind the Significant Rise of the AUD

The Australian Dollar led the weekly gains, mainly benefiting from a weakening US Dollar and a rebound in risk sentiment. During the Christmas holiday period, market liquidity shrank, and investors’ risk appetite increased, boosting demand for high-yield currencies.

However, it is important to note that trading during the holiday season was light, and the sustainability of large fluctuations remains to be observed.

Euro’s Rally Hits Resistance, Fed Expectations Are Key

The EUR/USD once surged to 1.1808, hitting a three-month high, but ultimately closed with a 0.52% gain. US Q3 GDP grew by 4.3%, exceeding expectations, but lagging effects limited its support for the currency market, with focus still on employment data.

According to the CME FedWatch Tool, the market has priced in a 62.9% chance of the Federal Reserve starting rate cuts in April next year. This is the core logic driving the euro higher—Fed rate cuts will narrow the US-EU interest rate differential, benefiting the euro.

Morgan Stanley provided a detailed forecast: in the first half of 2026, supported by narrowing US-EU interest rate spreads, EUR/USD could surge to 1.23, with a bullish scenario even reaching 1.30. However, the trend may reverse in the second half, as European fundamentals weaken and US economic resilience persists, with the euro expected to fall back to 1.16 by year-end.

On the technical side, EUR/USD faces significant resistance around 1.18. If it fails to break through this week, support levels are seen at 1.17, near the 21-day moving average. Conversely, if it successfully breaks above 1.18, there is more room to rise, with resistance around 1.186.

This Week’s Focus: The Fed meeting minutes and US/EU December PMI data will be decisive. If rate cut expectations intensify, the euro may continue to rise; otherwise, a correction could occur.

Yen’s Forecast Faces Challenges, Government Intervention Difficult to Change the Situation

Last week, the Japanese Yen appreciated by 0.74%, but this gain may be short-lived. The decline in USD/JPY was driven by increased risks of intervention by Japanese authorities.

On December 22, Japanese Finance Minister Shunichi Suzuki explicitly stated that recent yen fluctuations do not align with fundamentals and exhibit clear speculative features, hinting that the Japanese government may intervene in the foreign exchange market. This statement temporarily provided some relief for the yen.

However, forecasts from major institutions like JPMorgan and BNP Paribas are not optimistic. They believe that driven by high US-Japan interest rate differentials and negative real interest rates, USD/JPY could break through 160 in 2026. Overnight index swap data indicates the market expects the Bank of Japan to raise rates again in the second half of 2026, and in the short term, the yen lacks policy support.

The key issue is that pure foreign exchange intervention cannot fundamentally reverse the structural depreciation trend of the yen. Without aggressive monetary policy measures, government intervention can only serve as short-term support.

On the technical side, USD/JPY is currently above the 21-day moving average. If it falls below this level, the next support is at the previous low of 154.3. Conversely, if it remains above the moving average, there is potential for oscillation upward, with resistance around 158.

This Week’s Focus: US economic data and Japanese officials’ comments. Any shift in sentiment could impact USD/JPY. Due to ongoing intervention risks, upside potential for the yen may be limited.

Summary and Outlook

This week, the market remains affected by the New Year holiday, with overall trading subdued. The euro is watching for Fed rate cut expectations, and the yen is observing government intervention stance—both are at sensitive junctures. Although the AUD performed well this week, caution is advised regarding the trap of low liquidity during holidays. Investors should closely monitor data releases and officials’ statements to seize opportunities prudently.