Central Bank Roundup: Part I

Since we’re seeing a few shifts in monetary policy biases these days, I thought it’s about time for me to come up with another central bank roundup. Take a look at where the policymakers stand and how their stance could affect forex trends.

U.S. Federal Reserve (Fed)

Unless you’ve been living under a rock, you’d know that the Fed is widely expected to hike interest rates during their December policy meeting. Not only has U.S. economic data been showing consistent improvements, but the decision-makers over at the FOMC themselves actually confirmed that the central bank is on track for a liftoff before the end of the year.

Now this isn’t exactly big news for forex junkies, as most market watchers had already been pricing in expectations for a Fed rate hike for the past few months. Besides, Fed officials have been emphasizing that their tightening cycle would be a slow one, which suggests that it may take a long while before they follow up with another rate hike.

Still, the fact that the U.S. central bank is probably the only one in the hawkish camp might be enough to keep the Greenback supported against its forex peers for the rest of the year. Then again, any downbeat reports reminding traders that succeeding rate increases ain’t set in stone just yet could keep the dollar’s gains in check.

Bank of England (BOE)

These folks from Threadneedle Street were also in the hawkish camp for the past few months, but the latest set of events revealed that BOE policymakers packed up their stuff and left. From previously reiterating that they could be able to start tightening monetary policy in early 2016, BOE officials swallowed their pride and admitted that interest rates could remain low for much longer.

Now this reflects a pretty significant shift in stance, which explains why the pound has been giving up a lot of ground against its forex rivals these days. It didn’t help that data from the U.K. hasn’t been all that impressive, painting a different economic picture compared to earlier this year.

Still, BOE Governor Carney pointed out during this week’s Inflation Report hearings that he doesn’t see the need for negative interest rates for now, which means that the U.K. central bank isn’t exactly moving over to the dovish camp. But given how the British pound has advanced on expectations of a 2016 rate hike, there could be a lot of unwinding of these long GBP forex positions in the weeks ahead.

Reserve Bank of Australia (RBA)

In the Land Down Under, the policymakers over at the RBA shared that they’ve been seeing more green shoots in the economy. Even with the risks stemming from China’s stock market slump last quarter, RBA officials seem confident that the economy could carry on with its recovery.

Because of that, the latest RBA statement  sounded a tad more upbeat than their previous ones, leading forex participants to believe that the Australian central bank is no longer looking to lower interest rates any further. While the RBA isn’t also likely to move over to the hawkish camp anytime soon, their shift to a less dovish stance could still yield gains for the Australian dollar since the currency has been weighed down by rate cut expectations in the past.

As you’ve probably guessed, I’ve lumped the Fed, BOE, and RBA together in this set because they’re the least likely ones among the bunch to announce additional easing measures for now. But, as I always say, anything can happen in the forex market so it’s best to stay aware of these policy biases while being on the lookout for potential changes!