The Japanese Yen's decline temporarily pauses, and the US dollar retraces to send signals【Forex Market Review】

This week (February 18-22), the global foreign exchange market experienced a series of significant shocks. The US dollar index initially fell and then rose, ultimately closing up 0.27%, while non-dollar currencies generally came under pressure. The Japanese yen fell 0.89%, the euro declined 0.44%, the Australian dollar dropped 0.78%, and the British pound decreased by 0.52%. The synchronized decline of the yen and other major currencies reflects a market environment where the dollar’s strength is returning.

Euro Fluctuates Repeatedly, Non-Farm Payroll Data Drives Outlook

Last week, EUR/USD rose to a high of 1.2082, the highest since June 2021, but then faced correction pressure.

Market sentiment shifted dramatically amid mixed policy signals. U.S. President Trump stated he was not worried about the dollar depreciating, which initially sparked widespread speculation about a long-term weakening of the dollar, pushing the dollar index near a four-year low. However, the announcement of Kevin Warsh’s appointment as the new Federal Reserve Chair reversed market expectations. Warsh is known for advocating balance sheet reduction, and his appointment raised concerns about tightening liquidity, causing the dollar to rebound sharply and EUR/USD to decline.

Key data released this week further deepened market changes. The European Central Bank kept interest rates unchanged on February 5, in line with expectations. The U.S. January non-farm payrolls released on February 6 showed about 70,000 new jobs added, with an unemployment rate of around 4.4%, indicating slower employment growth than expected. Weak non-farm data reinforced bets on the Fed cutting rates this year, which should have been positive for the euro, but the strong dollar dominated, leading to sideways movement in EUR/USD throughout the week.

Technically, EUR/USD remained relatively resilient supported by multiple moving averages. The current price stays above the 21-day moving average of 1.191. If it can retest the previous high near 1.208, it would be a meaningful test. Conversely, if it continues to decline, key support levels are the 21-day moving average at 1.174 and the 100-day moving average at 1.167. Market observers generally believe that expectations for rate cuts by European and U.S. central banks will remain the main factor influencing this currency pair’s future performance.

Yen Declines Sharply, Political Changes Trigger Market Turmoil

The yen experienced significant depreciation pressure this week. USD/JPY was especially volatile around Japan’s general election.

Last weekend, concerns about Japanese government intervention in the currency market temporarily boosted the yen, but as expectations for the new Fed Chair’s policies strengthened, USD/JPY regained upward momentum. On February 8, the results of Japan’s House of Representatives election showed the Liberal Democratic Party (LDP) performed better than expected, further consolidating Prime Minister Suga’s political base.

The yen’s decline accelerated. Mitsubishi UFJ Morgan Stanley Securities analysts noted that a landslide victory for the LDP would strengthen Prime Minister Suga’s push for aggressive fiscal policies, including tax cuts. Strategists at Invesco warned that Suga’s proactive fiscal stance has been viewed by global investors as a key driver of yen weakness, prompting more capital to short the yen. Market expectations suggest the Japanese government may face increased pressure to intervene verbally to stabilize the yen.

On the technical side, USD/JPY successfully broke above the 100-day moving average and continued to rise this week. If the upward momentum persists, next resistance levels are at the 21-day moving averages of 156.5 and 158.0. If USD/JPY falls below the 100-day moving average, support levels are around 152. Given the yen’s ongoing decline amid political stability, concerns about the currency’s outlook remain.

Next Week’s Market Focus and Outlook

The global forex market has entered a new phase of balancing. The root cause of the dollar’s strength—the Fed’s policy expectations—will determine the next direction. The performance of the euro and yen will depend on their respective central banks’ responses. Investors should continue to monitor Fed officials’ speeches, economic data releases, and Japan’s stance on the yen, as these factors will shape the new landscape of the forex market in the coming weeks.