Octa Broker Explains What to Expect from the Upcoming Central Bank Decisions

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.