USD/JPY tests new highs, EUR/USD reversal imminent? Fed rate cut expectations change

Central Bank Policy Shift Accelerates Foreign Exchange Market Adjustment

Last week (11/10-11/14), the foreign exchange market showed clear divergence, with the US dollar index down 0.28%, but individual currency pairs varying significantly. The euro rose 0.46%, the Australian dollar increased 0.68%; the Japanese yen depreciated 0.73%. Behind these seemingly simple numbers, there are fierce fluctuations in the Fed’s rate cut expectations and a reassessment of the policy stances of various central banks.

US Employment Data Becomes Decisive, Euro/USD Enters Critical Period

The market’s focus is now on whether the Federal Reserve will cut rates in December. According to the latest CME FedWatch Tool, the probability of a 25 bps rate cut is only 45.8%, while the chance of holding rates steady is 54.2%—a stark contrast to previous market expectations. The turning point came when Fed officials recently adopted a “hawkish” stance, dispelling the market’s earlier optimism about a easing cycle.

On November 12 (US Eastern Time), Trump signed a temporary funding bill, ending the longest government shutdown in history, lasting 43 days. After the government reopened, market focus quickly shifted to economic data releases. The September non-farm payroll report on November 20, the third-quarter GDP revision, and October PCE Price Index will be key indicators for determining the Fed’s policy direction.

Analysts suggest that if the US labor market weakens further, it will reinforce rate cut expectations, exerting downward pressure on the US dollar and benefiting the euro’s relative performance, pushing the euro/USD higher. Conversely, strong employment data will weaken rate cut expectations and support the dollar’s strength.

On the technical side, EUR/USD has broken above the 21-day moving average but has not yet surpassed the 100-day moving average resistance at 1.166. A break above this level could trigger a larger rally, otherwise the probability of a decline increases, with support at the previous low of 1.146.

Japan’s New Prime Minister’s Stimulus Policy Surpasses Expectations, Yen Depreciation Trend Difficult to Reverse

Last week, USD/JPY rose 0.73%, driven by signals from Japan’s new Prime Minister, Sanae Takaichi. She hinted that the Bank of Japan would slow the pace of rate hikes and lean toward implementing expansionary fiscal policies, which are expected to continue pressuring the yen.

Takaichi’s government is set to announce an economic stimulus plan this week, with reports suggesting a scale of about 17 trillion yen. Goldman Sachs warns that an unexpectedly large stimulus could reignite market concerns over Japan’s fiscal discipline, potentially pushing long-term sovereign bond yields to record levels and further depreciating the yen.

It is worth noting that Japanese authorities’ intervention stance on yen depreciation has not yet significantly strengthened. Mitsubishi UFJ Morgan Stanley Securities believes that, to protect foreign exchange reserves, relevant Japanese departments might tolerate the yen weakening to around 161 yen per US dollar.

On the technical side, USD/JPY remains above multiple moving averages, with RSI indicating a strong bullish trend. In the short term, USD/JPY may test the 155 level again, opening upward space. If the breakout fails, support is at the 21-day moving average of 153.38.

Market Focus for This Week

Pay attention to the US September non-farm payroll data, October FOMC meeting minutes, November PMI data from Europe and the US, and the scale of Japan’s economic stimulus plan. Changes in Fed rate cut expectations and the economic performance of Europe and the US remain core factors influencing the USD and EUR/USD trends, while whether Japan’s stimulus exceeds expectations will determine if USD/JPY can continue its rally.