Central banks' decisions week: what should investors be prepared for?

• The Bank of Japan (BOJ), Federal Reserve (Fed), and Bank of England (BOE) will announce their interest rate decisions and release their latest monetary statements on 31 July and 1 August.
• Investors and traders will learn the latest details on the future direction of interest rates in the three major economies of Japan, the U.S., and the U.K.
• The Federal Reserve has kept its benchmark interest rate unchanged in the 5.25-5.50% range since July 2023 and will likely continue to stand pat for another month.
• BoJ is expected to continue scaling back its significant economic stimulus measures. Specifically, the regulator might consider an interest rate hike at its upcoming meeting. They might also announce a plan to gradually reduce their bond-buying program over the next few years.
• Investors expect the Bank of England to cut rates from 5.25% to 5%.

Relative monetary policy drives currencies' exchange rates. Therefore, the market pays close attention whenever a central bank holds a meeting and issues updates on its monetary policy. This week, three central banks—the Bank of Japan (BOJ), the U.S. Federal Reserve (Fed), and the Bank of England (BOE)—will announce their verdict on interest rates on Wednesday and Thursday. All three decisions will be released in less than 48 hours. Traders and investors will closely watch all the announcements, policy reports, and subsequent press conferences. Overall, the market is assuming that global central banks (except the Bank of England) will leave interest rates unchanged. Octa offers a brief overview of what to expect.

Bank of Japan

The Bank of Japan's decision will be the subject of discussion in the early hours of the Asian trading session on 31 July. At its last meeting on 14 June, the Bank of Japan unanimously kept its key short-term interest rate unchanged at 0.1%, as was expected. However, the yen weakened that day, and USDJPY continued to grind higher as  BoJ failed to provide any details on the reduction in bond purchases.  

The central dilemma facing the Bank of Japan is that a rapid rate hike could weaken the economy. According to Reuters, more than 70% of economists expect the BOJ to skip raising interest rates, but the market has started to expect some action on stimulus policies. Indeed, the board has indicated it may consider how to begin cutting bond purchases at its July meeting. The move was passed by a majority vote of 8 to 1. The BOJ currently buys about 6 trillion yen worth of bonds per month.

USDJPY has been in a downtrend for the past three weeks after hitting a multi-decade high on July 3.  The market speculated that BoJ might take action to support the yen, but the latest data showed little new evidence of government intervention in the market. At the same time, the national Consumer Price Index (CPI) was unchanged at 2.8% in June, while core CPI declined to 2.6%. It remains to be seen whether the BOJ will see justification for a policy change next week. The lack of hawkish signals from the BOJ on 31 July could lead to another USDJPY jump towards the 155.00-158.00 area.

Federal Reserve

The week's most important event will be the Fed's interest rate decision, due Wednesday at 6:00 p.m. UTC. The U.S. central bank is arguably the most important worldwide as it issues the global reserve currency, the U.S. dollar. Therefore, its decisions are always the most anticipated for traders and investors as they affect essentially all USD pairs and U.S. stocks and commodities.

At its last meeting, the Federal Reserve left the interest rate in the range of 5.25-5.50% for the seventh consecutive time. The Fed has often indicated that it intends to keep the target funds rate in the 5.25-5.50% range until confidence grows that inflation is steadily approaching 2%. Some progress has been made in fighting inflation, but it remains unclear where it can be sustained. The latest US CPI came in below expectations but remained uncomfortably high at 3%, which is above the Fed’s target. At the same time, the producer price index (PPI) accelerated to 2.6% in June (from 2.4% in May). Meanwhile, the unemployment rate rose from 3.9% to 4.1% in June, negatively impacting the U.S. dollar.

Federal Reserve Chairman Jerome Powell said last week that recent inflation data ‘adds some confidence’ that the pace of price growth is steadily returning to the central bank's target. Weak macroeconomic data combined with Jerome Powell's dovish comments have prompted investors to increase their bets on interest rate cuts. Indeed, interest rate swaps market data currently imply more than 60 basis points worth of rate cuts by the Fed by the end of the year.

Unsurprisingly, the dollar index (DXY) has been in a downtrend for the past month but has been unable to break down through the 103.60 support level. DXY is now trading in the 104.00-104.50 range. If the price can close above 104.55, we should expect a rise to the 105.50-106 level. Conversely, a break below 104.00 would open the way towards 103.30.

Bank of England

The Bank of England's verdict on the interest rate is expected on Thursday, 1 August, at 11:00 a.m. UTC. In June, the Bank of England kept its key rate at 5.25% for the seventh time in a row—the highest in 16 years, as expected, with two members calling for a reduction to 5%.

The latest economic indicators show U.K. inflation returning to the 2% target level for the first time in nearly three years, driven by lower energy prices compared to the previous year. GDP growth has exceeded expectations slightly, but consumers continue to struggle. At the same time, the unemployment rate remained unchanged at 4.4%, while average weekly earnings continued to rise strongly.  The Monetary Policy Committee (MPC) has recognised that a tight labour market could push up the headline rate of inflation later in the year. Still, BoE is widely expected to deliver a 25-basis-point rate cut when it meets on 1 August. Octa analysts believe five MPC members will vote for a rate cut, with four voting for ‘no change’ and no members voting for a rate hike.

Over the past month, the GBPUSD pair has been trading upward, but bulls have started to lose control since July 17. The BoE's decision will precede the Fed's decision, so at this stage, it is difficult to predict where the GBPUSD pair will move on Thursday, 1 August. However, it seems reasonable to infer that a BoE rate cut is already largely priced in by the market. Traders should be alert to any changes in the MPC rate vote and monitor any new details that could emerge in the Monetary Policy Summary and Monetary Policy Report.