Here’s three scenarios for each of the three central bank decisions
A – Fed
- The last hike. A clear message that they are on pause (with obvious caveats that they would be prepared to do more if the situation arose). Victory laps on inflation coming down. Worried about the economy, worried about too tight financial conditions. Low probability – Very bearish USD & yields.
- Hike and keeping another firmly on the table. Data dependency for the next hike. Maintaining the higher for longer message. Warnings about a ‘job still to do’ on inflation. Financial conditions tightening but not yet to problem levels. Economy still doing well but monitoring any weakness. Jobs still strong. High probability – USD & yield positive but may not be lasting as the market will still anticipate we’re at the end of the cycle.
- Hawking til the end. Hike now, definite hike later. May pause after that but with an eye for further hikes. Economy still strong. Inflation is still a big problem, worried about it returning. Low/medium probability – Very bullish USD & yields.
B – ECB
- Another last hike. The doves finally draw the line in the sand and it’s time for the hawks to concede some ground. Tighter financial conditions, falling inflation/PPI data, worsening economy (especially Germany). Recession fears. Low probability – Uber bearish EUR.
- A hike and September very much in play (data dependency again). Core inflation still sticky (went up last month) but other parts of the economy are notably slowing. Financial conditions are tightening further. Recession still not base case but risk to the outlook is growing. To maintain higher for longer until the job is done on inflation. Talk on increasing QT. High probability – Moderately bullish EUR strength (again may be time limited). There’s a bit more dovish expectation to undo here than for the Fed.
- July and Sep are going to see rates rise. Door not closed for hikes after that. Not concerned with financial conditions. Data is troubling but will not stop them hiking unless it gets much worse. No recession likely. QT increase announced and spun almost like a rate hike replacement to keep tightening policy stance. Medium probability – Bullish EUR.
C – BOJ
- No action, no tweaks, no forecast changes, no language changes, no hints – Low probability – Very bearish JPY.
- No action but higher inflation forecasts (at least above target for FY2023, small chance above target FY2024). Language change to reflect change in inflation assumption to more hawkish. Hints for a tweak later down the line High probability – Bullish JPY
- Forecasts up, a YCC tweak, language hawkish but cautious – Low/medium probability – This would bring a big bout of strength for JPY but also give the BOJ some breathing space. YCC isn’t interest rates so it’s not huge tightening if they move the band. We may see too much of a market overreaction on this outcome.
Obviously there are many different outcomes for these three bank meetings but I hope this give you a broad set of outcomes with which to base your trading plans on.