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The Forex Analytix February 2023 Central bank preview

The Fed

What’s expected?

  • 25bp hike.
  • Re-emphasise the high-for-long policy on rates.
  • Pushing the soft landing narrative.
  • A good start on inflation but more to do.

What are the surprises?

  • 50bp hike, or even unchanged.
  • Any indication rates may not get to the dot levels, i.e a pause is coming sooner than. expected.
  • Worries about wages and second wind upside effects for inflation.
  • Changes to QT (Bigger = Hawkish. Smaller = Less hawkish).

What assets should we watch?

  • US yields – 10yr, 2yr & 1yr.
  • S&P

Obviously USD all over but USDJPY can often be a cleaner trade, particularly as we have the ECB the next day. EURUSD might not move too far out of sync on the Fed while it has one eye on the ECB. Same for GBPUSD and the BOE. 

Let yields be thy guide for what USDJPY might do.  If yields move, do they hold? If not, don’t expect USD to stay the course either.

Monitor what stocks (S&P) does over the event. I’m still looking to see if the risk definition has changed. Do they go up if Powell pushes the soft landing narrative and keeps a hawkish slant? Do they keep to the old ways and rise if Powell is less hawkish on policy or less bullish on the economy?



What’s expected?

  • 50bp hike.
  • Promise of more to come (2 more 50’s).
  • Reiterate they will continue until inflation is under control.
  • Also a good start on inflation but more to do.
  • Resilience in the economy.
  • QT to start in March.

What are the surprises?

  • Lagarde rolling back some on the 50bp promise.
  • Larger division among the ECB members for another two 50 bp hikes (maybe this comes from the usual sources pieces after).
  • Any changes to the upcoming QT program (earlier/later start, bigger than expected).

What assets should we watch?


I don’t feel that this event is going to bring any big surprises so reaction may be limited. However, there’s a risk here that EUR holds something back after the Fed just to get over the ECB hump, so be careful not to get sucked into a false sense of security until the presser is over. If, for example, USD is screaming higher but EURUSD looks like it’s holding back, it may play catch up when Lagarde is done talking. Then be on watch for the sources drops.


The BOE (with MPR)

What’s expected?

  • 50bp hike and confirmation of a drop to 25bp going forward, and a possible pause time.
  • Reaffirm the need to be vigilant on inflation being more persistent.
  • Change in forecasts

What are the surprises?

  • 25bp hike.
  • The votes – Last time 7 voted for hikes (6x50bp, 1x75bp), 2 voted for to keep rates unchanged. Likely we see the same hike/unch numbers but if more shift to the unchanged vote, that will be far less hawkish.
  • Statement/minutes show that rate hikes may not stop as quickly as expected.
  • Some pushback against the market’s year-end pricing of a rate cut.
  • MPR forecasts. Will the BOE be more bullish or bearish on the economy?

What assets should we watch?


Having the BOE and ECB so close together could present some interesting opportunities. For one, the ECB is the bigger bank so by size it favours EUR over GBP on big euro news. Secondly, if the BOE says or does something that kicks this out of sync with what the ECB are expected to do, that’s when it will get my keen interest. We’ve got some good range edges to play here. 


Generally, while there is room for some shocks, I don’t see anything that might be game changing. The Fed’s not going to say rates are going to 8%, the ECB are not going to announce rate cuts from next month. In market expectation terms, we’re pushing food around the plate. To that end, I’m going to be looking at trading the range edges over all these CB’s, if seen. But, don’t also forget the NFP on Friday, as that could turn everything from these CB meetings on its head (in USD terms). Get a hawkish Fed followed by a -300k NFP and that plate of food might be smashed on the floor.

Our ‘Wizard of Waves’, Grega has some excellent analysis on USD into the FOMC and Stelios has a great overview of central banks in the early part of this year.

What will be the trading themes for 2023?

A new trading year begins but will it follow the same path as 2022?

The good thing about trading is that some things change, and some things stay the same. For 2023, that’s going to continue.

Here are 4 important themes to watch for.

1- The big central bank split

Most of 2022 was all about hiking. Pretty much all central banks were aligned in the hike cycle (lots obviously playing keep up with the Fed) as they attempted to fight the inflation that ballooned. The big change this year will again be one of divergence as all the effects from hikes take hold. The soft/hard landing theme the Fed has been talking about will apply to all countries this year. To that end, while there will be plenty of moves in major pairs, it’s perhaps the crosses that will see the bigger moves. AUDNZD has been a very early indicator for the central bank divergence trade. RBNZ governor Orr said in August that the aggressive tightening cycle may be over, they may need to slow hikes and that perhaps only 2 more hikes were needed. They then hiked twice more with the latest one stepping up to 75bp from 50bp and said they’ll keep going. This came as the RBA slowed hikes down to 25bps. No surprise then to see that AUDNZD topped out soon after those Orr comments and went on to over a 1000 pip ramble lower before steadying.

As central banks look to the end of their hike cycles, the differing speeds and rate positions will be a key element in trading. While the ECB playing catch up to the Fed may not be a big trade for EURUSD, the BOJ maybe moving towards tightening could be big for JPY and the crosses of those that are slowing hikes. The new hawkish shift from the ECB vs the slowing position from the BOE could be a big mover for EURGBP that’s spent a big chunk of 2022 in a rough 300-400 pip range.

But it’s not just about hiking. The market always wants to trade ahead and one big theme that will rise in 2023 is when central banks will start to cut due to the expected recessions. We’ve already been seeing that trade coming to the fore with the Fed. It started with the “pivot” players and has grown since the last FOMC, even as the Fed set a higher expected rate ceiling. If the smaller central banks are forced to turn dovish on economic weakness ahead of the bigger banks, that’s more divergence to trade.


2 – Soft landings, hard landings, crash landings, no landings?

Slowdown fears are to dominate the early part of the New Year. China with its covid wave could impact global growth at a time when growth is slowing in major economies anyway. The ECB are stepping up hikes into a predicted recession. We still haven’t felt the full effects from all the Fed hikes that have come relatively quickly. The UK is predicted to disappear into yet another economic abyss. 2023 is going to be about who suffers the most and who suffers the least. From an investor standpoint, the flows will go to those (once again) who have the least dirty shirt. If the Fed can steer through some economic weakness and keep a strong jobs market, Long USD, long stocks and short bonds will be the trades.

Are we headed for big economic slowdowns or contractions, or just some mild weakness?

Grading the economic scores will be important for understanding how bad things may or may not get, and thus what the various central banks will do. A bit of flatlining growth may not be good news but it won’t be as bad as a serious contraction which leads to widespread job losses. Economies running at +/- 1.0-2.0% growth through 2023 won’t be a disaster. 

Whichever country suffers the most will have the central bank who potentially has to cut back on rates first. Watching the data will continue to be important and growth will now be as important as inflation.

Inflation is likely to continue to fall back further from 2022 highs but it’s where it settles that will become important. If we see big weakness in economies, we could even enter deflationary-like scenarios as the world goes into “discount” mode. Big job losses will demolish wage inflation, commodity prices will fall. It actually won’t take much to tip the scales the other way. Something like employment in Q1 turning sour might be enough to get the ball rolling but like GDP, it will be about the scale of it. 


3 – Redefining the “risk” trade…again

Risk on/risk off has had many guises over the last 10/15 years. Even into a huge global hike cycle, stocks found a bid on risk off and poor economic data. Stocks have been disconnected from the fundamentals (some may say reality) for years but this time might be different. Why?

High interest rates for one thing. It’s been a long, long time since the world has seen interest rates as high as they are now, and they are set to go somewhat higher still. That’s effectively a whole new ball game for some investors. Bar any economic shocks, QE should be dead and packed away in the emergency tool boxes. Economic weakness isn’t going to lead to QE (aka cheap money to park in stocks). For the first time in many years, stocks may actually have to reflect the real fundamentals. If that happens the definition of ‘risk’ is going to change, as will many other themes we’ve been used to over the past years. 

Good data should become good for stocks, and vice versa, and the same applies to interest rate expectations. Good data should mean slower, or shallower paths to central bank neutral levels.


4 – Geopolitics is still a big risk for 2023

Let us not forget that there’s still a war raging in Ukraine. There’s still growing tension between Russia and the West due to it. It’s really still a binary event as to whether things get worse or better. We obviously all hope it’s resolved for the better. There’s still the effects from that war playing out in markets. The European continent still has to get through winter, and continue its transition away from Russian energy supplies. The weather could be a big factor for the growth picture in Q1 and early Q2. Energy price rises are still going to be an issue for some countries, particularly the UK, and that will keep some inflation pressure in the pipe.

And then we have China still watching the Ukraine/Russia situation while it keeps a firm eye on Taiwan. Tensions with the US are still high and how that situation develops this year could be another important aspect to trade.

On top of all that we still have other bubbling situations like Iran and North Korea. Overall, there’s a big East/West play going on and how that further develops in 2023 will be yet another important factor.


How will the year’s events play out?

There’s going to be different speeds and timescales for some of the events, so let’s have a rough look at some timeframes.

Q1 – Q2

Global growth is likely to be an early feature. The soft/hard landing trade. We’ll see how 2022 finished and get an idea of 2023. These early months can be a good indicator for how the market wants to set itself for the year ahead. 

For this, we’ll be looking at the data, and whether the Fed will get rates to their ceiling or not? Will the ECB get its rate hikes in, or be forced to stop early? Who will slow or stop hiking? It could be a fast moving process.

Japan also finishes its Fiscal year and Kuroda leaves the BOJ. Will there be big wage negotiations? Will the new governor be more hawkish or Kuroda MKII? This is going to be a key moment for Japan and JPY.

If we get enough clues early on, we can start to position for the trends to come.

Q2 – Q3

The market will have an idea of how things are going and we’ll likely be trading when rates will start coming down again, assuming economies are softening. We’ll be trading the complete opposite of 2021 into 2022 and how rate hike expectations grew but probably not to the same extent or extremes. We’ll be in the thick of “neutral rate” trading, which we know, for most central banks, is in the 2-3% area. The expectation trade will be whether banks will (and when) get to neutral, or if things are looking bad, will have to cut below neutral.

I’d expect inflation to have found its own form of neutral level but that’s dependent on how economies are doing. There will be a scale. Deflationary pressures from a steep economic slump and we’ll be expecting central banks to cut more sharply. If economies aren’t so bad and inflation doesn’t pull back as much, they’ll stay more neutral to hawkish.

Q3 – Q4

We’ll be in the thick of all the above. If central banks are starting to talk cuts, we’ll be pricing when that will happen but unless economies are really tanking by then, the expectations will be for rate cuts into early 2024. Remember, when trading central bank expectations, the big moves and trends happen over what the market thinks they’ll do in the future, not what they do at any given time, so if we’re trading rate cuts, we’ll be trading in 2023 for what’s expected to happen by the end of the year, or into next year.


Final thoughts

What is likely to continue in 2023 is volatility, which will be good for our trading. Volatility gives us opportunity. It’s a godsend for short and longer-term traders and strategies. As a longer-term trader, I’ll be looking for the trend changes (or late-2022 continuations) to ride through 2023 but there should be plenty of pips in the short-term plays too. Coming into the year, I still have a general short USD, long JPY bias (I’m short USDJPY, long AUDUSD). I’ll be looking at EURGBP (I’m long) for perhaps a continuation of the ECB catching up to the BOE, though I still think the BOE may be forced to hike higher than it expects due to higher and/or more persistent inflation.

When one tries to look ahead at the future, one has to be realistic. I have as much an idea about what is going to happen in the next 5 minutes as I do over the course of a year, which is, I have no idea. Situations can change very fast, especially in geopolitics but things like the trends in data and central bank monetary policy often move much slower, so there is plenty of time to get on the trends if we spot them early but it also doesn’t matter if we miss the start. We can never rule out black swan events but we can also never predict them so there’s no point in worrying about them until they happen. All we can do is make sure we have some protection in place via stops, be they ‘disaster stops’ (in case of black swan events) or otherwise.

Now, if you want to keep track of the predictions from any of the team, and learn how they develop and how they’re traded, feel free to join us in our chatroom. Use code FFL20 for a 20% discount for as long as you subscribe.

So, however you trade, my main piece of advice for 2023 is the same as every year. Manage your risk, manage your trades, manage your expectations, and let the price action do the talking.

All of us at Forex Analytix wish you a prosperous 2023.