Relative monetary policy drives currencies’ exchange
rates. Therefore, the market pays close attention whenever a central bank holds
a meeting and updates its monetary policy stance. This week, three major
central banks—the U.S. Federal Reserve (Fed), the Bank of England (BoE), and
the Bank of Japan (BoJ)—will announce their verdicts on interest rates on
Wednesday, Thursday, and Friday, respectively. All three decisions will be
released within a short span of 48 hours, possibly triggering above-normal volatility.
Arguably, the most anticipated event is the Fed’s
decision, but it is also the one most clouded by market’s uncertainty and is
therefore likely to produce the most significant impact on the market. The BoE
is likely to keep its base rate unchanged, but the probability of a
25-basis-point (bps) cut is not insignificant. Likewise, BoJ is not expected to
announce any grand changes in its approach, but its ultra-loose monetary policy
stance remains a subject of intense debate. The combined impact of these central
bank announcements could lead to substantial market movements and shifts in
investor sentiment. Octa Broker offers a brief overview of what to expect.
Federal Reserve
The most important event of the week will be the
Fed’s policy rate decision, which is due on Wednesday at 6:00 p.m. UTC. This
time, the Fed’s decision is even more important than normally because it will
be accompanied by the publication of the latest FOMC Economic Projections
report, including the so-called ‘dot plot’, showing how each Fed member
projects future interest rates. The Fed only publishes its projections four
times a year so investors will study them carefully.
Last time, the Fed projected only one rate cut in
2024 despite some progress being made on inflation fighting. However, following
the reports of weakening labour market, investors began to anticipate more
cuts, driving the U.S. Dollar Index (DXY) to a one-year low and, in turn,
pushing the price of gold to an all-time high. Indeed, the latest interest rate
swaps market data implies more than 250 bps worth of rate cuts by the Fed by
the end of 2025. As for the upcoming decision, investors currently price in a
59% probability of a 50-bps rate reduction and a 41% probability of a smaller
25-bps rate cut.
‘The decision is too
close to call, with chances more or less evenly split between a small cut and a
bigger cut’, says Kar Yong Ang, a financial market analyst at
Octa Broker, adding that ‘because
investors are positioned for a dovish Fed, they will probably treat a 25-bps
cut as bullish for the dollar and bearish for gold’.
While the actual decision is certainly very
important, the post-meeting statement and the latest FOMC Projections carry
additional weight. Even if the Fed decides to deliver a super-sized 50-bps
interest rate cut, it might include some hawkish language into its post-meeting
statement, or the ‘dot plot’ may undicate fewer rate cuts for 2025 than the
market hopes. Kar Yong Ang, a financial market analyst at Octa Broker,
explains: ‘We might get a ‘hawkish cut’.
Traders will get what they hoped for in the short-term, but will have to adjust
their long-term expectations. Either way, I think there is an elevated risk of
a downward correction for gold and U.S. stock indices’.
Bank of England
The BoE’s verdict on the interest rate is expected on
Thursday, 19 September, at 11:00 a.m. UTC. In August, the bank cut its key rate
by 25 bps to 5% after a closely divided vote among policymakers who were split
over whether inflation pressures had eased sufficiently. The bank also
indicated that it would be ‘careful’ on its next moves ‘to make sure inflation
stays low’. Although inflation has picked up since then, the rise was smaller
than expected as services prices, a closely watched metric by the BoE, rose
less rapidly than was anticipated. In fact, the chances of another 25-bps rate
cut in September have been grinding higher slowly but remain relatively low,
around 36%.
‘As always with BoE
decisions, it is important to monitor the shifts within the BoE MPC (Monetary
Policy Committee) rate voting. Previously, five MPC members voted for a rate
cut and the market expects only two policymakers to do the same this time around.
However, it is highly likely that we may witness a more dovish sentiment taking
hold within BoE’, Kar Yong Ang, a financial market analyst at Octa
Broker, adding that GBPUSD risks falling below 1.31100 in case BoE decides to
cut the rates.
Bank of Japan
BOJ’s decision will
hit the wires in the early hours of the Asian trading session on 20 September. At
its last meeting on 31 July, BoJ sent shockwaves
through the financial markets, as it raised its short-term interest rates and announced a halving of its monthly
bond buying program. At his post-meeting news conference, Kazuo Ueda, BOJ
Governor, said that the central bank will continue to raise rates if the
economy moves in line with its forecasts. He added that policymakers ‘don’t see
0.5% as any key barrier’. However, BoJ rhetoric has since changed and the bank
has sought to reassure investors that its commitment to maintaining a
supportive monetary environment remains intact.
A recent Reuters poll indicates that most economists
anticipate the BoJ will raise interest rates again before the year ends. Over
three-quarters of the surveyed economists predict a rate hike in December.
However, none of them expect a rate increase to occur at the upcoming policy
meeting this week.
Kar Yong Ang, a financial market analyst at Octa
Broker, has the following comment: ‘Yen
has appreciated by as much as 13% against the greenback since 10 July. Without
a doubt, this would put import costs lower and help keep inflation down. A rate
hike is certainly not coming. In fact, I would not be surprised if BoJ uses
this opportunity to inject another dose of dovish statements into the market.
They want to keep rate hike expectations balanced’.
About
Octa
Octa is an international broker that has been providing online trading
services worldwide since 2011. It offers commission-free access to financial
markets and a variety of services used by clients from 180 countries who have
opened more than 52 million trading accounts. To help its clients reach their
investment goals, Octa offers free educational webinars, articles, and
analytical tools.
The company is
involved in a comprehensive network of charitable and humanitarian initiatives,
including the improvement of educational infrastructure and short-notice relief
projects supporting local communities.
Since its
foundation, Octa has won more than 70 awards, including the ‘Best Forex Broker
2023’ award from AllForexRating and the ‘Best Mobile Trading Platform 2024’
award from Global Brand Magazine.