FX markets prepare for Fed, ECB, BOE decisions

There’s a trio of major central bank meetings within a few hours of each other so markets expect some volatility. 

An unchanged FOMC rate decision is a certainty at its last meeting of the year.

Markets will focus on the Fed’s updated dot plots and quarterly economic projections.

The recent sharp fall in Treasury yields has caused an easing in financial conditions, which is undoing some of the Fed’s previous rate hikes.

This is probably too early for most Fed officials with inflation still sticky, so a push back is widely predicted.

Policy rate dots, which currently have only 50bps of cuts for next year, will likely disappoint money markets who price in around 110bps of cuts next year.

Will investors look through these dots given their poor track record?

Or will they potentially instead react strongly, as was the case in September?

Watch 2024 forecasts for Fed guidance

Expectations are for modest revisions lower in inflation and the unemployment rate, while growth should be lifted higher.

Next year’s projections will be in focus as policymakers might forecast GDP higher in a hawkish signal, but then mark inflation down which would justify another rate cut for 2024.

Chair Powell will need to be watched intently in his press conference after the statement.

His most recent pre-blackout comments reiterated that policymakers are still not talking about policy easing any time soon. Similar words could dent the recent risk rally and give a bid to USD.

EUR/USD and GBP/USD eye central banks

It could be a bumpy couple of sessions for FX markets as the Bank of England (BOE) and European Central Bank (ECB) also meet tomorrow.

This gives markets little time to digest the FOMC decision.

Both of these central banks on the other side of the Atlantic will stand pat on rates, but the amount of push back by both will direct the euro and pound.

A support zone in EUR/USD sits around 1.0765.

But if ECB President Lagarde opens the door ajar to hints of rate cuts, prices could drop sharply to 1.0732 and the round figure of 1.0700.

A more hawkish tone is expected from the “Old Lady”, which is a nickname forthe Bank of England.

UK wage growth remains strong even though it is falling from record highs, while there is still some work to do to bring inflation back to target.

However, the BOE may be forced to give in to the weakening UK economy.

It’s monthly GBP shrank by 0.3% in October, deeper than the minus 0.1% forecast, while deterioration was also seen in its manufacturing, construction, and services sectors.

The heightened prospects of BOE rate cuts in 2024 may translate into a weakening bias for Sterling.

The 200-day SMA in cable sits at 1.2495 and may be called upon for immediate support for GBPUSD.