Major central banks’ rate announcements, including updates from the Reserve Bank of Australia (RBA), the US Federal Reserve (the Fed), the Bank of England (BoE), the Bank of Japan (BoJ), and the Swiss National Bank (SNB), are at the focus of events this week. Along with the manufacturing and services PMIs for the US, the UK, and the euro area, we also welcome the inflation figures from Canada and the UK.

FOMC: Emphasising dots

This week, the Federal Open Market Committee (FOMC) policy-setting meeting—which airs on Wednesday at 6:00 pm GMT—will surely take center stage in the headlines.

Regarding a rate reduction at this meeting, the Fed’s refusal to budge is all but guaranteed. A dovish Powell and robust economic data are the main reasons the OIS curve is pricing in a pitiful 1.0% chance of a 25bp decrease.

A June cut is still possible (with -15bps of easing put in), but July is now fully priced for the first 25bp decrease (-26bps) due to the hawkish repricing. Both the PPI and CPI inflation were higher than economists’ expectations at the headline level (YoY) for February (headline CPI inflation has been stabilizing around the 3.0% mark since October 2023 [sticky inflation]), with Mum headline measures (Jan-Feb) showing a beat in PPI data and CPI coming in as expected. The US labor and growth statistics are still vital, and the inflation numbers are heating up.

 

Since a rate change is quite unlikely, the focus will be on the Rate Statement that goes along with it and the FOMC rate projections, especially the dot plot (which is released quarterly). A dovish change was noted in the most recent FOMC estimates when the Fed predicted three 25bp rate reductions this year and four cuts in 2025. Although there isn’t much evidence to indicate a change in the forthcoming projections given the most recent data, if one is seen—or if the language in the Rate Statement is meaningfully changed—it will significantly impact all of the major asset classes.

In the end, the Fed will likely stick to its current line of three rate reductions per year and wait for more proof that inflation is steadily approaching the 2.0% objective before acting. If this materializes, there may be a decline in the value of the US dollar after the announcement. Relevantly, the US Dollar Index is approaching the daily resistance’s underside at 103.62, a level supported by the 200- and 50-day simple moving averages (SMA) at 103.69 and 103.55, respectively, ahead of the event.

BoE is set to remain silent.

There is little to no chance that the MPC will lower rates this week, much like the Fed (and most other central banks this week). The event is set to stream on Thursday at noon GMT. For the sixth meeting in a row, the Bank Rate is expected to stay at 5.25%, and some desks are also predicting another three-way MPC vote. The OIS curve is still fully pricing in the first 25bp rate cut for August’s meeting, and September’s meeting is also now a possibility, considering the recent hawkish repricing.

The UK economy expanded by 0.2% in January, according to the most recent GDP growth statistics released before the event, and was consistent with market expectations. This came after a 0.1% month-over-month decline in December 2023 and two quarters of decline in the latter part of the previous year. The information suggests that the UK economy moved away from recessionary conditions, which will be good news for those in 10 Downing Street.

The headline inflation rate for January stayed constant at 4.0% (YoY) and the core reading at 5.1% (YoY), but both prints slightly undershot analyst predictions. But the day before the BoE rate announcement on Wednesday at 7:00 am GMT, we will be receiving February inflation data (median projections indicate inflation is projected to decelerate to 3.6% [headline] and 4.6% [core]). Regarding the job market, pay growth slowed somewhat recently, although unemployment increased little.

Overall, the pound (GBP) will be watched closely around these events, and any notable miss in the inflation numbers this week will likely favor shorts (and be bought on any meaningful upside surprise). It’s also possible that a noteworthy out-of-consensus report will change policy projections.

Rate rise announced by the BoJ?

Rumors that the BoJ may raise its Policy Rate this week have been supported by stronger-than-expected wage gains and Rengo’s 5.0% salary increase during the first phase of wage talks.

The BoJ is expected to appear on Tuesday at around three in the morning GMT. According to market pricing, investors are divided heading into the event, and it is essentially a 50/50 bet on whether the central bank exits its hostile interest rate policy (NIRP). Should a 10bp rate hike come about, a move from -0.1% to 0.0%, the Policy Rate increase would mark Japan’s first hike since 2007.

A rate increase this week would probably encourage the Japanese currency (JPY) and JGB yields to rise. Should a rate hike not come to fruition, traders will be closely watching for any hawkish language to suggest a pivot in April, increasing demand for the JPY.

G10 FX: Picture 2 (five-day change)