Central banks in focus: Key levels for NZD/USD, EUR/GBP and USD/JPY

Central bank decisions are the major highlight of the week, with the Federal Reserve, Bank of England and Bank of Japan set to announce their monetary policy decisions. Much of the market’s attention will be on their policy statements and comments for clues about future rate paths as rates decisions are expected to be in line with expectations.

Apart from the central bank events, CAD will once again be in the spotlight as Canada’s inflation report is scheduled for Monday. The BOC adopted a hawkish tone at its last meeting, highlighting inflationary pressures. However, fragile employment conditions and trade tensions between the US and Canada have limited the currency’s ability to benefit from higher oil prices. A softer inflation report could challenge the BOC’s hawkish stance and leave CAD vulnerable to further weakness.

The lead-up to the BOE monetary policy decision is particularly interesting. UK labor market figures and Wednesday’s CPI report could cause some push and pull for GBP before Thursday’s decision, making it difficult to maintain a clear directional bias for the currency.

Fed: NZD/USD tests support around 0.5809

The Federal Reserve is set to announce its decision on Wednesday, September 16, with expectations leaning towards a 25-basis-point rate hike. The market’s focus will be on forward guidance and clues about further increases.

If the Fed continues to acknowledge inflationary pressures, especially from higher energy prices amid the US–Iran conflict, markets could price in further rate hikes, potentially strengthening the US dollar.

Although there is a catch: if Chairman Kevin Warsh avoids committing to a future rate path and keeps subsequent decisions dependent on incoming data, the reaction could be less straightforward. A hike accompanied by guidance that falls short of market expectations could leave the dollar vulnerable, particularly if US Treasury yields decline.

NZDUSD is one of the majors to watch this week. Geopolitical tensions have not eased, leaving the high-beta NZD susceptible to weakness. The 50.0% retracement level around 0.5809 has held so far, keeping price above the level after sellers tested it twice in September.

Sellers will be looking for a break below this level if market sentiment remains negative and the Federal Reserve offers hawkish forward guidance. A sustained break could bring the 61.8% retracement around 0.5767 into focus.

Buyers could also remain hopeful of another rebound from this level if diplomatic progress improves market sentiment and the Fed offers little support for expectations of further hikes.

BoE: EUR/GBP recovery faces a test

The Bank of England is expected to leave interest rates unchanged at 3.75% on Thursday, September 17. Its previous decision saw six members vote to hold and three vote to hike. Whether that split remains unchanged will be one of the details to watch in this meeting.

We may not see much fireworks from the rate decision itself, but the market will pay attention to the vote split, policy statement and meeting minutes for any hawkish or dovish changes. GBP could also experience sharp swings as traders respond to labor market figures and Wednesday’s inflation report ahead of the decision.

EURGBP is a pair to watch this week as it continues its recovery following the steep decline that lasted until mid-July. On the EUR side of the equation, the European Central Bank raised rates at its latest meeting, with higher energy prices remaining a concern for the inflation outlook.

Any weakness in UK data this week could allow EURGBP buyers to pick up pace from support around 0.8575 and launch another move towards the 0.8625 region, where resistance awaits.

On the other hand, a sustained break below the lower boundary of the channel around 0.8575 could put sellers back in control. Stronger UK data or a more hawkish BOE message would help support that move.

BoJ: USD/JPY bears eye 152.00

JPY has been one of the strongest currencies recently as markets have increased their bets on further Bank of Japan rate hikes. Expectations include a potential 25-basis-point increase to 1.25% at the upcoming meeting.

There will be plenty to unpack from the policy announcement and Governor Kazuo Ueda’s comments. The market’s focus will be on whether the BOJ signals a faster pace of tightening or maintains a cautious approach to subsequent increases.

Ueda does not necessarily need to deliver an aggressively hawkish message to support the yen. However, if traders have already priced in a faster pace of rate hikes, a cautious message could disappoint those expectations and trigger some profit-taking.

USDJPY is down over 3.5% in September, with sellers applying pressure as bets on a hawkish BOJ decision mounted. Price broke below key support levels around 157.000, 156.000 and 155.000 before settling around 153.533 at the close of the week.

Sellers will be looking for a break below support around 152.000. A sustained move below this level could strengthen the bearish structure and open the way towards the lows around 148.000, although intermediate support levels could slow the decline.

Buyers will also be watching for a potential rebound around 152.000, especially if the FOMC delivers a more hawkish message than expected and the BOJ offers limited guidance on further tightening.

US and Japanese bond yields will be important in determining how the pair develops this week—all eyes on 152.000.