Central banks overview: investors are poised for an eventful week ahead

• The Bank of Japan (BOJ), the Reserve Bank of Australia (RBA), the Federal Reserve (Fed), the Swiss National Bank (SNB), and the Bank of England (BOE) will announce their policy rate decisions and issue their latest monetary statements on 19 – 21 March.
• Investors and traders will get some fresh clues on the future path of interest rates in five major economies—Japan, Australia, the U.S., Switzerland, and the U.K.
• All five central banks are expected to keep the rates steady but will likely announce important changes in their monetary policy statements.
• BOJ may finally announce an end to its ultra-loose monetary policy, although the chances are 50/50.
• AUD traders should watch if the RBA softens its tone and discounts the possibility of a rate hike.
• The key event is the Fed's decision, which comes with the latest FOMC projections and the ‘dot plot’. The Fed's decision will likely overshadow other central banks' decisions and potentially trigger a sell-off in gold and euro.
• CHF will take a hit if SNB announces a rate cut.
• BOE's rate vote might shift in a dovish direction, hurting the British pound.

Relative monetary policy drives currencies' exchange rates. Therefore, whenever a central bank holds its regular meeting and changes its monetary policy, the market pays close attention. Next week, five central banks—the Bank of Japan (BOJ), the Reserve Bank of Australia (RBA), the U.S. Federal Reserve (Fed), the Swiss National Bank (SNB), and the Bank of England (BOE) will declare their verdict on interest rates in the space of less than 72 hours. Their decisions, announcements, and subsequent press conferences will be closely watched by traders and investors alike. Overall, the market assumes that the global central banks (besides BOJ) will embark on an easing campaign this year. However, the key question is timing: when exactly will the regulators make their first move and which central bank will be the first to lower its base rate? Octa offers a brief overview of what to expect. 

Bank of Japan

BOJ's decision will hit the wires in the early hours of the Asian trading session on 19 March. The market generally expects the central bank to leave its ultra-loose monetary policy unchanged, with the short-term rate target remaining at −0.1% and the 10-year Japanese Government Bond (JGB) yield target staying at around 0%. However, it is a close call. Investors have recently started to price in a higher chance that the BOJ will finally make a policy shift and phase out its decade-long stimulus program. Indeed, there are reasons to expect the Japanese central bank to end negative rates. 

First, inflation seems to be holding pretty well. The latest Tokyo core Consumer Price Index (CPI) rose 2.5% in February from a year earlier, which is the fastest annual pace since October 2023. At the same time, nationwide core CPI for January came out stronger than expected and has remained above 2.0% for almost two years now (since April 2022). Second, a preliminary survey on the outcome of big firms' wage talks yielded strong results on Friday. This follows the recent decision by Toyota Motor, which agreed to give factory workers their biggest pay increase in 25 years. Because Kazuo Ueda, the BOJ Governor, has repeatedly signalled that the decision to phase out stimulus depends on wage inflation, the progress made during the year's annual wage talks certainly increases the likelihood that Japan's central bank will finally increase its short-term interest rate target, terminate its bond yield control policy and end the practice of purchasing risky assets such as exchange-traded funds.

If the BOJ delivers a hawkish verdict, USDJPY will almost certainly plunge—possibly below 147.00. Conversely, should BOJ maintain the status quo, USDJPY will trend higher or stabilise in the 148.00 – 150.00 range. 

Reserve Bank of Australia

RBA will announce its rate decision on 19 March at 3:30 a.m. UTC. At its last meeting, the Australian central bank held its cash rate unchanged at 4.35% and is likely to do so again on Tuesday. As with other central banks, the RBA's main problem is inflation. It remains above the official target and has recently accelerated from 3.4% in December to 3.6% in January. Indeed, during its previous meeting, RBA suggested that a rate hike remains on the table precisely because the growth in consumer prices has not slowed as fast as the regulator hoped it would. Overall, however, the market believes that policy easing will eventually follow. According to the interest rates swaps market data, investors are pricing in roughly 37 basis points (bps) worth of rate cuts by RBA in 2024, with the first rate cut widely anticipated in August. 

If the RBA delivers a hawkish verdict, AUDUSD will almost certainly rally—possibly above 0.66400. Conversely, should the RBA indicate the preparedness to cut the rates in summer, AUDUSD may trend lower or stabilise in the 0.65200 – 0.66000 range. 

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. The U.S. central bank is arguably the most important central bank in the world as it issues the world's reserve currency, the U.S. dollar. Therefore, its decisions are always highly anticipated by the market, and, in fact, they often overshadow the decisions of other central banks. This time, however, the Fed's decision is even more important because it will be accompanied by the publication of the latest FOMC Economic Projections report. This report is critical for the market because it includes the ‘dot plot’, showing how each Fed member projects future interest rates. The Fed only publishes its projections four times a year so that investors will study them carefully. 

Last time, 17 of 19 Fed officials projected lower interest rates by end-2024, effectively providing a green light for traders to price in a more aggressive Fed cutting cycle. On the day the Fed telegraphed its previous projections, gold price (XAUUSD) rallied more than 2% and then increased by another 3% throughout ten trading sessions. So the importance of the upcoming Fed's decision should not be underestimated.  

According to Reuters, analysts expect the Fed to maintain its Funds Target Rate in the 5.25 – 5.50% range. However, the market expects roughly 75 bps worth of rate cuts in 2024. Thus, traders are not positioned to see a ‘hawkish surprise’ from the Fed. It is a risky position because surprise may be coming as inflation remains sticky. The latest U.S. Consumer Price Index (CPI) came out higher than expected, while the Producer Price Index (PPI) accelerated to 1.6% in February (from 0.9% in January). 

Overall, the Fed is likely to err on the side of caution and strike a delicate balance, indicating that while inflation remains a problem, rate cuts in 2024 are not out of the question. Still, investors will probably have to push back their expectations for an early rate cut, and the probability of a 25-bps rate reduction in June may decrease. In this case, XAUUSD will probably correct to the downside—possibly towards the 2,140 – 2,130 area. 

Swiss National Bank

SNB's decisions rarely move the markets sharply. However, the Swiss franc (CHF) may devalue if the SNB announces a rate cut or gives a dovish message on Thursday at 8:30 am UTC. The probability of a 25-bps rate cut currently stands at 33%, but most market participants expect the first rate cut in June. Indeed, SNB is likely to hold the rates steady at its next meeting as monthly inflation accelerated to 0.6% in February. Projecting what would happen to USDCHF after the SNB decision is tough because the Fed's decision will overshadow it. The key levels to watch are 0.87000 on the downside and 0.89000 on the upside. 

Bank of England

The week will wrap up with the BOE's verdict, due on Thursday at 12:00 p.m. UTC. GBPUSD has recently managed to escape its three-month-old trading range and set an eight-month high. However, the pair has been on the downside lately as inflation figures from the U.S. disappointed investors, while the U.K. labour market showed signs of weakness. According to the interest rates swaps market data, investors are pricing in roughly 60 bps worth of rate cuts by BOE in 2024, with the first rate cut anticipated in either June or August.

As in the case of SNB, the BOE's decision will be preceded by the Fed's decision, so it is difficult to forecast where GBP pairs will move on Thursday. However, traders are advised to monitor any shift in BOE's Monetary Policy Committee (MPC) rate voting. Previously, two MPC members voted for a rate hike and one for a rate hike. If the number of doves within the MPC increases, GBP will take a hit.