But what can we expect from the meetings, and how could these announcements impact the foreign exchange market? We outline below our expectations for this week’s Federal Reserve, Bank of England and European Central Bank monetary policy meetings.

Federal Reserve

We expect the Fed to strike a cautious tone on Wednesday, while pushing back against market pricing for US rate cuts in 2024. Recent communications from chair Powell have remained hawkish, and there appears to be a rather sizable disconnect between futures pricing, which sees a first cut in May, and FOMC rhetoric.

In our view, the aforementioned market pricing for US rates is excessive, a view that we expect the Fed to voice during this week’s meeting. Powell will likely stress patience, say once again that it is too early to declare victory over inflation, and warn that lower rates are not on the horizon for some time. Market participants will probably be anticipating a sharp downward revision to the ‘dot plot’ of interest rate projections, although we are not at all confident that these expectations will be met, with any downgrade in the 2024 median dot likely to be rather minor. We hold this view due to the following assumptions:

1. The US labour market remains tight, and has only shown modest signs of cooling.
2. Consumer spending continues to hold up very well.
3. The ‘final mile’ in the inflation fight will take time.

FOMC Preview Report

Bank of England

The MPC is almost certain to hold rates steady for the third straight meeting on Thursday. Communications from committee members since the previous meeting in November have remained rather hawkish, with Governor Bailey warning against rate cuts for the ‘foreseeable future’. We expect the MPC to reinforce this stance at its meeting this week, and effectively push back against market expectations for cuts, which continue to appear excessive. The vote on rates is likely to remain split 6-3 in favour of no change, although we would not be surprised to see a dovish shift in light of recent UK data, namely the softer than expected inflation and labour reports for October.

A 6-3 vote on rates, combined with rhetoric that reiterates no cuts for the foreseeable future, should be bullish for the pound given current market pricing. On the other hand, should the statement express greater optimism on inflation, and one or more MPC members shift their vote in a dovish direction, then we could see some modest downside in sterling towards the end of the week.

Bank of England December Meeting Preview

European Central Bank

Material changes in the economic environment since October, notably the deterioration in domestic demand and easing inflation, suggest that the ECB may begin to sound a more dovish note on Thursday. President Lagarde will likely acknowledge the progress made on inflation, although she may soften the message by suggesting that the fight hasn’t yet been won, and that the growth outlook remains uncertain.

Given the dramatic shift in expectations for ECB cuts in the past few weeks, the bar for a dovish surprise appears very high. It is difficult to see how the ECB could significantly add to market expectations for policy easing, suggesting that the risks to the euro are skewed to the upside leading into the meeting. We would likely see a rally in the common currency should Lagarde push back against the aggressive market expectations for cuts by saying that it is too early to consider policy easing.

ECB December Meeting Preview