What the FX Market Should Expect From Central Bank Meetings: BoJ, Fed, BoE

Stock data with dice and chips

Marshall Gittler, Head of Investment research, FXPRIMUS.com

With the ECB meeting out of the way, the FX market will now turn its attention to next week’s meetings of the Bank of Japan (15th), Fed (16th) and Bank of England (17th).

Bank of Japan

On the one hand, Japan’s inflation isn’t going anywhere. The BoJ even invented a new measure of inflation that excludes fresh foods, energy and the effect of tax hikes in order to make it easier to meet its inflation goal, but that measure too turned down in January. To make matters worse, inflation expectations are falling too. Thirty-year bond yields recently hit 0.48%, the lowest rate in recorded history for long-term debt. So there are reasons for the BoJ to act again.

On the other hand, Japanese bank stocks basically collapsed following the BoJ’s introduction of negative interest rates on fears that the move would pinch Japanese banks’ profits. That could force them to raise loan rates in order to increase profitability. Furthermore, the BoJ board only voted 5-4 in favor of going to negative rates. That’s a very close vote that doesn’t inspire much confidence in such a radical move.

One of the four people who voted against negative rates – Ms. Sayuri Shirai – will be leaving the BoJ board on March 31st, and another, Mr. Koji Ishida, will be leaving on June 29th. Both were appointed before Mr. Abe came into office. If I were Mr. Kuroda, I’d wait until Mr. Abe had replaced these two with more sympathetic board members before taking action again, rather than risk having the vote go against me. That’s why I think he will wait at least until April and probably until July before taking further actions, unless something big happens before then. That would suggest to me that the yen is likely to strengthen after the upcoming BoJ meeting.


Few people (only 4 out of 74 polled by Bloomberg) expect the FOMC to raise rates at next week’s meeting. Nonetheless, I personally think the market is underestimating the likelihood of more rate rises this year.

This graph shows the FOMC’s forecasts for the Fed funds rate for the next several years. As you can see, there’s a huge gap. The FOMC forecast at least 3 rate hikes this year, while the market is only pricing in about a 70% chance of even one. But does the Committee really need to hold off so much?

They have a dual mandate: they have to aim for full employment, which they estimate to be a 4.9% unemployment rate, and price stability, which they define as a 2% rise in the core personal consumption expenditure. With unemployment at 4.9% they’ve already met one goal, and with the PCE at 1.7% they’re pretty near to meeting the other.

So why didn’t they move in January? They explained that they are “closely monitoring global economic and financial developments and assessing their implications for the labor market and inflation, and for the balance of risks to the outlook.” Note that they said “global economic and financial developments,” not just “domestic economic and financial developments.” So apparently a lot depends on whether global growth recovers and markets around the world stabilize.

There’s still a question about global growth. The IMF just today warned that it might have to downgrade its forecasts for global growth as the world faces the “risk of economic derailment.” On the other hand, many US economic indicators are starting to come in better than expected and financial developments are particularly encouraging. Since the last FOMC meeting in January, 82 of the 91 stock markets tracked by Bloomberg are up (led by Brazil at +47%!), commodity prices have bottomed, oil is up, and the VIX index has plunged to 17.6 from 27.6.

The dot plot will be the key point to watch at next week’s meeting. The Committee members are likely to lower their forecasts, but I don’t think they’re likely to change as much as the market expects. I think so long as the Committee is still forecasting at least two rate hikes this year, the market will have to adjust its rate expectations upwards. That is likely to strengthen the dollar.

Bank of England

The Bank of England is the easy one. They are likely to vote to stick with their current policy by a 9-0 vote again. The big question around the BoE is whether or when they will stop talking about hiking rates and start talking instead about cutting rates. Not yet, I would suspect, so I think that meeting should have relatively little impact on the pound.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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