Central Banks Overview: Investors are Poised For an Eventful Week Ahead

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● The Bank of Japan (BoJ), the Bank of Canada (BoC), and the
European Central Bank (ECB) will announce their policy decisions and issue the
latest monetary statements on 23 – 25 January.

● Investors and traders will finally get some fresh clues on the
future path of interest rates in three major economies—Japan, Canada, and the
Eurozone.

● All three central banks are expected to keep the rates steady
but will likely announce important changes in their monetary policy statements.

● BoC is arguably the most hawkish of the three, while BoJ is the
most dovish.

● Some central bank statements—if not all—will likely surprise the
markets.

● The doves hoping for early interest rate cuts may be
disappointed.

● Market expectations are currently skewed to the dovish side, so
any hawkish remarks on the part of central bankers will no doubt provoke
above-normal volatility in the forex market.

Relative
monetary policy drives currencies’ exchange
rates. Therefore, traders concentrate and take notes whenever a major central
bank is due to announce its policy rate decision. Next week, three central
banks—the Bank of Japan (BoJ), the Bank of Canada (BoC), and the European
Central Bank (ECB)—will declare their verdict on interest rates in the span of
less than 72 hours. Their decisions, announcements, and subsequent press
conferences will be closely watched by traders and investors alike. Overall,
the market assumes that the rate-hiking cycle is over and that global central
banks (apart from BoJ) will embark on an aggressive easing campaign this year.
However, the most ardent doves are likely to be disappointed. Octa offers a
brief overview of what to expect.

Bank of Japan

BoJ’s decision will hit the wires in the early hours of the
Asian trading session on 23 January. The market expects the central bank to
leave its ultra-loose monetary policy unchanged. Short-term interest target
should remain at 0.1%, while the 10-year Japanese Government Bond (JGB) yield
target should stay at around 0%. BoJ Governor Kazuo Ueda has repeatedly
stressed that there was no need to exit the central bank’s stimulus program
until inflation sustainably hits the 2% target.

In
this respect, the data is not looking good. Recent reports indicate that core
inflation in Tokyo was slowing while the nationwide Consumer Price Index (CPI)
hit an 18-month low in December. In addition, the latest quarterly survey on
households revealed that inflation expectations were declining. On balance, the
current macroeconomic trends support the view that BoJ is not ready to deliver
monetary normalisation at its 23 January meeting.

Last
time, BoJ surprised the market by not providing any signals about future
changes in policy, which resulted in a swift USDJPY rally. This time, however,
while keeping the broader policy unchanged, BoJ might provide clear further
guidance on the path of future interest rates. Besides, the central bank may be
impelled to give at least some hawkish signals because the Japanese yen has
already depreciated by over 5% over the past month. As of right now, the market
is pricing roughly 20 basis points worth of rate hikes by the end of 2024, with
the first increase anticipated in April. If, indeed, BoJ specifies its stimulus
exit plan, the USDJPY rally may reverse, potentially targeting the 142.00 level
again.

Bank of Canada

BoC’s
rate decision will be announced at 3:00 p.m. UTC on 24 January. The market
expects BoC to leave its overnight rate steady at 5%. However, the central bank
is unlikely to sound dovish because inflation remains elevated due to high
growth in Canadian wages and shelter costs. According to the official data,
annual inflation in Canada rose to 3.4% in December from 3.1% in November,
making investors scale back their expectations for an early interest rate cut.
During the press conference, Governor Tiff Macklem will probably attempt to
strike a cautiously hawkish balance, underlying inflation concerns and
acknowledging an economic slowdown.

Overall,
the BoC is probably the least dovish of the three central banks that will be
updating their policy statements this week. A slower move to rate cuts could
help support the Canadian dollar. Although USDCAD has recently rallied to a
one-month high, it faces stiff resistance in the 1.35500-1.36000 area. Should
BoC deliver a hawkish statement, the long-term bearish trend in USDCAD may
resume, potentially targeting the 1.34000 level. As of right now, the market is
pricing in roughly 100 basis points worth of rate cuts by the end of 2024, with
the first cut widely anticipated in April.

European Central Bank

The
ECB will issue its monetary policy updates at 1:15 p.m. UTC on 25 January. The
majority of economists polled by Reuters expect the central bank to leave its
refinancing rate at 4.50% and deposit rate at 4.0%. The signals from the ECB
have been rather mixed lately. In fact, contradictory statements from the
officials have made it more difficult for traders to assess the sentiment
inside the ECB and project the future path of interest rates. As a result,
investors’ interest rate expectations have been moving sharply in recent weeks,
causing volatile price action in EUR pairs.

Overall,
the ECB does not look like it is ready to deliver a rate cut. Headline
inflation remains above the official 2.0% target, while tensions in the Red Sea
have pushed cost inflation higher due to rising freight rates. The most likely
scenario is for the ECB to leave its monetary policy unchanged and clarify its
stance on future rate cuts. As of right
now, the market is pricing in roughly 130 basis points worth of rate cuts by
the end of 2024, with the first cut widely anticipated in either March or April.
If, indeed, the ECB decides to cool off the investors and make them dial back
their expectations for a rate cut, EURUSD may rally back above 1.09300.

About
Octa

Octa
is an international broker that has been providing online trading services
worldwide since 2011. It offers commission-free access to financial markets and
various services already utilised by clients from 180 countries with more than
42 million trading accounts. Free educational webinars, articles, and
analytical tools they provide help clients reach their investment goals.

The company is involved in a comprehensive network of
charitable and humanitarian initiatives, including the improvement of
educational infrastructure and short-notice relief projects supporting local
communities.

Octa has also won over 60 awards since its foundation,
including the ‘Best Educational Broker 2023’ award from Global Forex Awards and
the ‘Best Global Broker Asia 2022’ award from International Business Magazine.

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