Dollar under pressure: Can USD/JPY surge as EUR/USD steadies?

The dollar is being squeezed from both sides of the FX spectrum, forcing traders to reassess familiar year-end dynamics. USDJPY has managed to lift off a two-week low near 154.65 despite rising expectations that the Bank of Japan could deliver a December rate hike - a shift that pushed two-year JGB yields to 1% for the first time since 2008. 

EURUSD, meanwhile, holds steady at the moment, as the dollar index remains around 99.48, threatening a move toward 100.50 if sentiment shifts. This split - a yen supported by policy momentum and a euro holding under broad-dollar positioning - places the greenback at the centre of the pressure. 

With the Fed’s meeting approaching and Japan signalling further normalisation, the next few sessions will decide whether USDJPY can stay anchored above 155 or whether EURUSD’s price action becomes the dominant narrative into year-end.

What’s driving the two pairs’ moves?

Dollar trading is caught between two competing forces. On one side, weak US data has pulled Treasury yields lower, with the ISM Manufacturing PMI falling to 48.2 and Fed rate-cut odds for December are at 87.2%. 

That should, in theory, drag USDJPY down. Yet risk appetite has firmed across Asian equities, limiting the yen’s safe-haven bid and softening the impact of a more hawkish BoJ. This explains why USDJPY has bounced back toward 156 despite the strongest signals in years that Japan may raise rates.

The EURUSD has held above 1.16, despite the pressure on the dollar. Traders are watching whether the dollar index can hold above 99.40, a level that would make the euro more vulnerable to a test of 1.1550. 

Seasonal patterns would normally favour the euro in early and late December, but seasonality struggles for relevance when policy and yield differentials are driving direction.

Why it matters

The dollar squeeze affects more than currency traders. Multinationals hedge their year-end exposures during December, making sharp FX swings particularly disruptive. When USDJPY hovers near 156–158, and EURUSD edges toward 1.1550, corporate hedging models start tightening, often triggering mechanical flows that amplify intraday volatility. One Tokyo-based strategist told Bloomberg this week that “fundamentals and flows are clashing at the worst possible moment,” highlighting how thin liquidity magnifies each incremental move.

For traders, the stakes are even higher. A BoJ rate hike would reverse decades of ultra-loose policy and could send USDJPY sharply lower. Conversely, a softer-than-expected Fed tone may weaken the dollar broad-based and accelerate the euro’s rebound. Both outcomes are plausible, which is why markets are becoming hypersensitive to each data point ahead of the Fed and BoJ decisions.

Impact on markets and traders

Yield dynamics remain the clearest transmission channel. Japan’s 10-year government bond yield, which has climbed to a 17-year high, has narrowed the spread with US Treasuries significantly. 

That, according to analysts, reduces one of the structural supports for USDJPY, which explains why the pair struggled to extend its gains above 158 earlier in the quarter. Traders now see the 156 price level as the pivot that will decide whether the latest rebound fades or extends.

EURUSD faces its own structural constraints. The rebound in German yields should lend support to the euro; yet, the pair continues to track shifts in the dollar index more closely than domestic developments. 

According to analysts, a firm break below 1.16 raises the risk of a slide toward 1.1550, and models warn of flash-risk conditions that could push the pair near 1.1500 in thin liquidity. December’s typical euro strength from 22–27 December may help stabilise momentum, but it rarely persists when major policy events intersect with seasonal flows.

Expert outlook

Analysts remain divided on how the dollar squeeze will be resolved. Some expect USDJPY to soften into year-end if the BoJ signals confidence in its inflation outlook. Governor Kazuo Ueda has already pointed out that the likelihood of inflation meeting the 2% target is rising, and traders are now pricing in roughly an 80% chance of a December hike. A move of that magnitude would pull USDJPY quickly toward 152, and perhaps 150 if intervention chatter intensifies.

EURUSD’s path hinges almost entirely on the Fed. A December rate cut is nearly fully priced, leaving the dollar vulnerable to a hawkish surprise. If the Fed resists committing to a series of cuts, the dollar could bounce, pushing EURUSD back toward 1.1650 before sellers return. The key is whether the PCE data before the meeting shifts expectations again - or whether the Fed lets markets run ahead of it for now.

USDJPY technical insights

At the start of writing, USD/JPY is trading around 155.77, attempting to stabilise after its recent pullback. The pair remains capped by the 157.40 resistance level - a key zone where profit-taking typically emerges, but a breakout above it could reignite bullish momentum. Immediate downside levels to watch sit at 154.54 and 151.75; a break below either would signal weakening trend strength and could trigger sell liquidations as price slips through the lower Bollinger structure.

Despite the retracement, USD/JPY continues to trade within the upper half of the Bollinger Bands, suggesting that the broader uptrend remains intact for now. The pair may continue consolidating unless a fresh macroeconomic driver, such as U.S. yields or Bank of Japan commentary, pushes it decisively in either direction.

The RSI has bounced sharply to 64, rising just above the midline after briefly dipping lower. This shift indicates an improvement in bullish momentum, although it has not yet reached overbought levels. The indicator currently supports the idea of a stabilising trend, with room for upside if buyers regain control.

EURUSD technical insights

At the start of writing, the EUR/USD is trading around 1.1614, gradually pushing toward the key 1.1650 resistance zone. This level has repeatedly capped upside moves, making it an area where traders may expect profit-taking or a potential bullish breakout if momentum continues to accelerate. On the downside, immediate supports lie at 1.1550 and 1.1500, with a break below either likely to trigger sell liquidations and extend bearish pressure.

Price remains contained within the upper half of the Bollinger Band range, signalling a modest bullish bias but not yet a decisive trend shift. The pair continues to oscillate within a broad consolidation structure, suggesting that macro catalysts - such as U.S. data or ECB commentary - may be needed to drive a sustained breakout.

The RSI sits flat just above 51, showing neutral-to-slightly bullish momentum. This positioning reinforces the idea of steady but cautious buying interest, with room for further upside if EUR/USD can break cleanly above resistance.

Key takeaway

The dollar is being squeezed from both ends of the FX spectrum as USDJPY wrestles with BoJ tightening expectations and EURUSD absorbs broad-based dollar positioning. Yield shifts and upcoming central-bank decisions will determine which narrative dominates into year-end. Traders should expect volatility as thin liquidity meets major policy risks. The next moves in USDJPY and EURUSD may well define the early 2026 landscape.