Central bank rate cut race

The last Central Bank review of 2023

Now we’re over the December central bank hump, let’s look at what happened and what changed

This is a follow up to my post a couple of weeks ago: The final furlong of 2023, where I discussed what could happen with central banks through the end of 2023 and into 2024.

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Central banks

The final furlong of 2023

Here’s a trading review on where central banks stand and where they might be going in the last meetings of 2023

In a post at the beginning of the year, one of my timelines was that we would be well into playing the rate cut game by the end of the year. Well, here we are and with one last round of central bank meetings in 2023, the market is eager to see what they set up for 2024.

Let’s start with the Fed

The market is well into playing the guessing game for when hikes happen and how much rates will be cut. As usual, there’s a fairly large spread but the main consensus is that rates start to get cut from around the middle of 2024.

We have one more CPI report (12th Dec) before the FOMC (13th) and that will likely be a big mover for last minute rate expectations.

I believe that the Fed will use this meeting just to take them into 2024 with as little drama as possible. That would mean keeping the “job’s not done” stance on inflation, and saying that rates are still “restrictive” but not “sufficiently restrictive”. There is no need to start talking cuts, nor allow the market (which is pretty much always dovish) to get extremely dovish.

In fact, as I type this, Powell’s been out to give that exact message but the makret has given him the middle finger with USd selling and yields dropping.

There is a risk that Powell states that rates are “sufficiently restrictive”, and that might be what’s decided by the CPI report. A 2 handle on headline CPI would most certainly rule out a last hike and then that could give them the green light to use “sufficiently restrictive”. However, if that does happen, expect an uber strong message about “higher for longer” and making it clear cuts are not on the table yet (not that that might mean anything given the price action right after Powell).

For USD. There’s no outcome where the Fed are uber hawkish so any such rally is likely to be sold into. If Powell doesn’t deliver a ‘no change to view’ meeting, USD and yields will likely get smoked further than they are today.


Given the latest rounds of inflation data, we can also further rule out any more expectations for hikes. The ECB is comfortable where rates are and markets are playing the same “when will they cut?” game. The vast difference in Europe is that the fundamentals are looking far less rosy than currently in the US, and that’s a pressure that’s going to weigh on the ECB. We’ve also just had an inflation print of 2.4%, which puts them closer to their target than any of the other major central banks. Even if the core number remains higher, the headline is the number that guides them in their mandate.

It might be a tougher sell for Lagarde to keep the “higher for longer” message valid in her presser. I also think we may be approaching a situation where the market will start to worry whether they can ‘soft land’ inflation to target, or if it’s going to run straight through and keep going. That might not be something anyone will worry about for this meeting but it might become valid early in 2024, depending on the next inflation data.

We do potentially have the PEPP reinvestment discussion to think about, after recent comments from ECB sources but like the Fed and BOE, QT isn’t seen as a big hawkish monetary policy stick. We may get a move up in EUR if they do a bit more than stopping reinvestment but I doubt that will be a lasting move.

Overall, Lagarde will also not want to let the market get too dovish and therefore prematurely ease financial conditions.

For EUR. Today as I write this the euro is under the cosh for the very rate cut expectations I mentioned above. The Fed had its turn and now it’s the ECB’s turn. If anything, that means Lagarde might have to sell the ‘higher for longer’ message even more strongly at the ECB meeting. Like the dollar, any euro rise on strong non-dovish language might become a selling opportunity for some but we might also just find ourselves developing a new range to work into 2024.  Same as the Fed, any weakness in the message from Lagarde and EUR gets hit hard.


In this last week, I’ve slowly come around to the conclusion that the BOE might be becoming the most hawkish bank of the majors. Despite Bailey & Co being very bearish on the UK, they’re still troubled by sticky inflation and particularly wages and services inflation, which happens to be only the biggest sector in the UK economy…

While the Eurozone PMI’s wove a tale of accelerating price drops, the UK PMI told us that while input prices might still be falling, output prices were still rising. That’s the sticky effect right there.

I’ve had a view that the UK might be at risk of its economy tipping over faster than the others due to the height speed of hikes, and while it’s not out of the woods, it seems to be doing a touch better than Europe. It can all change in a heartbeat though but for now, the pound is down the charts for being spanked on cut expectations.

For the 14th Dec meeting, once again, hike expectations are low but there might be more of a hawkish tilt on the sticky inflation, which will then be offset by that dour view of the economy from Bailey. Only someone like him could manage a central bank meeting where the outcome might be both hawkish and bearish.

For GBP. Always the wild card currency but if a non-dovish/hawkish monetary policy message balances out a weak economic outlook message, GBP will probably do nothing and be thankful it’s not in the limelight like the others may be. GBPUSD and EURGBP will be the key movers for the trio of banks and the Fed and ECB will likely drive the moves more than the BOE will, so the strength or weakness of USD or EUR will define those pairs, more than the BOE will for GBP.

For the BOC and BOJ

These should pass by without incident. The BOC has been calmed by the pullback in inflation, after panicking over a two month hot streak. 

The BOJ will not be ruffling any feathers into the year-end. Their stall is set out about watching the wage negotiations in spring 2024.

However, one big question might raise its ugly head, and that’s what happens if inflation starts to drop going into the spring? The BOJ will be in a position to potentially start tightening on the higher wages, even while inflation might be down, or below target. Now they’ve made wages a big thing, they’ve done the unusual thing of painting themselves into a corner. If wages aren’t enough to tighten policy on, or if inflation is too low when those wages deals come through, and that keeps them easing, I dread to think where USDJPY goes on the upside. They might be getting into a bit of a hope trade that all the ducks align for them to tighten, and that happening is the only thing that could see JPY strengthen significantly.

The Central bank ABC – Easy as 123?

Here’s three scenarios for each of the three central bank decisions

A – Fed

  1. 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.
  2. 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.
  3. 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.



  1. 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.
  2. 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.
  3. 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.


  1. No action, no tweaks, no forecast changes, no language changes, no hints – Low probability – Very bearish JPY.
  2. 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
  3. 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.

Bank of Japan

Trading the BOJ

A new era begins for Japan’s BOJ

A new governor and a new direction for the BOJ? We’re about to find out so here’s some thoughts about trading it.

Just getting my (Ryan) ducks in a row ahead of the BOJ and I’m going to be watching a very wide area in USDJPY, which (give or take a few yens), we’re in the middle of (127-138). With events like this you have to know the sentiment on both sides of a pair so that you know how to react if something happens that moves the price the opposite way of that sentiment.

Right now, we know the market is less certain about the dollar, the Fed and the data, and the political stuff, hence why yields keep dropping and USD keeps a slightly bearish tone. So, if USDJPY rallies on the BOJ, and US yields remain under the cosh, as does USD vs other pairs, a rally here would look out of place, and then we ask how far does that go before a counter trade becomes too good to resist?

I’m positioned short already and happy to add up to that 138 if seen, and if only mainly driven from the JPY side. A sustained move over 138 and I’ll be reassessing that trade. On the otherside, a steep drop on the BOJ would mean they’ve signalled a change is coming and that’s going to lead to perhaps the start of a decent leg lower (120’s?).

The 127/128 will be where I’ll watch for an initial move becoming stretched. That will give me somewhere to look to take profit and also to add back (or add more) if it breaks. So, even if you aren’t already in a trade, these areas are where you may get an opportunity just based on the techs rather than the fundamentals.

USDJPY technical analysis chart

I also like my colleagues’ Kman’s view of AUDJPY as a BOJ trade. Again, matching off the fundamentals between the two, we’ve seen Aus inflation coming down more than expected, which pushes the RBA further towards less hikes, and Aus related commods haven’t been doing great either. So, again, any move that pushes AUD out of sync with its own issues potentially leads to a decent counter trade. I’m watching another zone in the pair.

AUDJPY technical analysis chart

Now, you may think that I’m taking it for granted that the BOJ are going to move away from easing, and thus JPY will definitely rally but that’s not the case. I’m just going on the signals I’m deciphering from the BOJ and the data, that they are as close to being able to end easing as they’ve ever been, plus I think inflation is going to stay toppy for them, as it is for everyone else. The evidence (IMO) is stacking up for them to be able to turn and I’m happy to trade that until something comes along that makes those thoughts invalid.



Trading JPY, BOJ Ueda, forex

Big (risk) in Japan

We have two huge events for JPY on Friday in Japan

On Friday in Japan we have CPI numbers and then BOJ nominee Ueda attending his first hearing in the Lower House. These can both be big movers for JPY.

Japanese inflation

Core inflation is expected to rise to 4.2% vs 4.0% pr y/y.

If this number is hotter than expected, yen could gain significantly at least on a kneejerk reaction. The opposite is likely if the number is softer than expected and/or lower than last month. Whatever the move, the market will still be thinking about Ueda next so any significant move may revert to a more neutral stance quickly after.

BOJ’s Ueda

This is a tough trade. On one hand we have the risk that he’s being brought in as a changing of the (monetary policy) guard. Someone who’s not of the old ‘team easing’. That in itself is hawkish if true. But, on the other, even if he is being implemented to lead Japan out of the ultra loose policy, he won’t be doing so in a rush and keeping markets from getting too expectant will be his ultimate task.

So, finding the balance in any comments is going to be important. The last thing he is likely to do is rock the boat with any big hard hitting comments in his first real public event. For example, he could say an exit will be looked at but then counter by saying something like it might take 10 years to get there. There really is a ton of permutations we can find for this, both hawkish and dovish, and that means potentially big volatility for markets.

How to trade it

Purely from a risk perspective, I think the lowest risk trade might be to buy a dip in USDJPY on a strong CPI number to hold into/over Ueda.  If he plays it ultra safe on exit talk, JPY pairs are likely to rally. If the market quickly fades a drop in USDJPY on the CPI, that could give longs some trading margin to play with into Ueda.

On the otherside of the pair, USD is still bullish while expectations for the Fed remain more hawkish, so dips are currently very shallow while US yields hold up on their highs. Therefore, long USDJPY is the path of least resistance. But, the risk is if the CPI is strong, and Ueda is hawkish, and then we’re likely to see a much bigger downside move. On that scenario there’s going to be a battle between a newly hawkish BOJ and a currently hawkish Fed.  If I had to pick a side, I would pick the JPY side as the BOJ turning hawkish would be a far bigger and longer-term event than whether the Fed is possibly going to take their rate ceiling up a mere 50bps from 5.5% to 6%.

In trading we often try to cover all the bases when trying to pick a trade but for me, I always look for the one that has, in my opinion, the least risk. Therefore, there may be many other trades to take, on many other possible outcomes but when I take a step back and look at all the parts (US & Japan) from a wider perspective, this is the one I like the most. Does it mean it will succeed? No. Does it mean I will definitely get a trade? No. In the first instance, I won’t be interested if there not a significant move over the CPI. Plus, I am still running some core shorts down to 131 so I may even use a strong CPI number to reduce or get out of that trade, with the consideration of Ueda sending USDJPY much higher.

On the tech front, we have a big closing confluence area high 136’s, low 137’s, then 138’s


To the downside, 133.00/132.80 is the first big level. then 131.50-131.00/25.

Maybe the best advice I can give to traders is that as this is a big risk event, it does no harm to stay out and wait until the dust settles so that we have a clear idea of what may follow.  No one is going to miss a big trend move in one moment. Yes, we may miss the start, or a big initial move but something like the BOJ changing stance won’t be “priced” in one day. The saying “If in doubt, stay out” has served me well lover the years.

Whatever you do, however you trade, please trade safe and good luck.