Central Banks Hit Pause — But the Next FX Move May Be Closer Than You Think

Major central banks are hitting the pause button — but that does not mean the tightening cycle is over.

The Federal Reserve and European Central Bank both kept rates unchanged this week, while the Bank of Japan is also expected to hold after raising rates in September. Yet inflation remains a concern, helped by higher energy prices, and markets are already looking toward the next round of rate hikes.

For FX traders, that creates an important shift. The question is no longer simply which central bank will raise rates, but which one will turn more hawkish than markets already expect.

The Fed's October pause came after a 25-basis-point hike in September. With inflation still elevated, traders currently see roughly an 80% probability of another increase in December.

The ECB is following a similar path. It left rates unchanged on October 29, but rising energy prices are creating fresh upside risks to inflation. Policymakers are increasingly looking toward December as the next possible opportunity to tighten policy.

Japan could join them. After raising its policy rate to 1.25% in September, the BOJ is expected to pause in October. A Reuters poll found most economists expect another increase to 1.50% in December.

Meanwhile, the BOE and RBA could move even sooner. Markets are close to fully pricing a BOE hike next week, while another Australian rate increase is also seen as increasingly likely after stronger inflation and hawkish comments from RBA Governor Michele Bullock.

EUR/USD: If Both Hike, Who Looks More Hawkish?

EUR/USD may become one of the clearest examples of why the next phase of FX trading is about relative expectations, not simply higher rates.

Both the Fed and ECB could raise rates in December. ING currently expects a 25-basis-point increase from both central banks.

That means a Fed hike alone may not automatically translate into a much stronger dollar.

If US inflation stays hot and the Fed signals that further tightening could follow, the dollar could regain momentum and pressure EUR/USD.

But if the ECB becomes more concerned about inflation and strengthens the case for a December hike, the euro could find support — particularly if expectations for additional Fed tightening are already largely reflected in the dollar.

What to watch: US inflation and jobs data, Eurozone inflation, and any change in December rate expectations.

USD/JPY: December Could Change the Story

USD/JPY may offer an even more interesting policy divergence trade.

The pair has recently been trading around the upper-150s, with the dollar supported by high US yields and expectations of further Fed tightening.

But the BOJ is becoming less dovish.

After September's rate hike, economists surveyed by Reuters largely expect the BOJ to move again in December, taking the policy rate from 1.25% to 1.50%. Policymakers are also increasingly focused on preventing underlying inflation from moving too far above the 2% target.

That creates two very different scenarios.

Fed stays hawkish + BOJ delays: USD/JPY could remain supported, keeping 160 in focus.

BOJ signals a December hike + Fed expectations soften: the yen could recover quickly, increasing downside pressure on USD/JPY.

For traders, the BOJ's guidance may therefore matter just as much as the actual rate decision.

GBP/USD: The BOE Could Move First

Sterling faces a different setup.

While the Fed and ECB are looking toward December, the Bank of England could raise rates as early as November.

Markets are almost fully pricing a hike after stronger-than-expected September inflation and renewed wage pressures. ING expects the BOE to raise rates in November and again in February.

The first hike, however, may already be largely priced in.

For GBP/USD, the bigger question will be what comes next. If the BOE suggests November is only the beginning of another tightening phase, sterling could receive further support. A cautious “one-and-done” message would be less bullish.

The FX Trade Is Shifting From “Will They Hike?” to “Who Will Hike More?”

The latest central-bank meetings may look quiet on the surface, but the policy gap between major economies is starting to move again.

The Fed and ECB could both tighten in December. The BOJ may follow. The BOE and RBA could move even earlier.

That makes the coming weeks particularly important for EUR/USD, GBP/USD and USD/JPY.

For FX traders, simply knowing that rates could rise is no longer enough. Much of that expectation may already be reflected in currency prices.

The bigger moves could come when a central bank turns more — or less — hawkish than the market expects.