Central Bank Policies Update: Key Decisions Impacting Global Markets

As we enter the quieter Christmas holiday week, trading activity is expected to slow, resulting in lower liquidity and market volatility. Central banks worldwide are indicating a change in their monetary policies. Some are adopting more cautious approaches while others are revising their outlooks due to concerns about inflation and growth.

Global Monetary Policies & Economic Forecast

US Federal Reserve System

• Rate Cut: The Fed reduced rates by 25 basis points, bringing the target range to 4.25-4.50%.
• Hawkish Tilt: Updated economic projections reflect a more hawkish stance, with higher interest rate expectations for 2025 and 2026.
• Cautious Approach: The Fed emphasised a careful approach to further rate cuts, highlighting concerns about potential inflationary pressures and the need to maintain economic stability.

Bank of Japan

• Rate Hold: As widely expected, the nine-member BOJ board kept its short-term policy rate unchanged at 0.25%.
• Cautious Stance: The central bank emphasised the importance of closely monitoring economic data and inflation trends, reflecting its cautious approach to monetary policy adjustments.
• Potential Tightening: While maintaining a dovish outlook, the BOJ indicated that future rate hikes might be considered if inflationary pressures intensify. Policymakers likely decided to hold off this month, preferring to wait and confirm economic trends. However, the conditions for another hike are increasingly being met, even as they remain cautious about uncertainties stemming from US President-elect Donald Trump’s economic policies and their potential global impact.

Bank of England

• Rate Hold: The BoE kept its key borrowing rate steady at 4.75%, as widely anticipated by markets.
• Diverging Views: Members of the Monetary Policy Committee (MPC) showed divisions, with three policymakers advocating for rate cuts despite recent inflation acceleration.
• Market Expectations: Markets responded to the announcement by pricing in a 53-basis points reduction in interest rates for 2025, indicating cautious optimism for potential easing.
• Economic Data: UK retail sales for November underperformed expectations. Monthly sales increased by 0.2%, falling short of the 0.5% forecast but recovering from October’s 0.7% decline. On a year-over-year basis, growth slowed to 0.5%, significantly below the prior 2% and the 0.8% forecast.

European Central Bank

• Rate Cut: The ECB reduced interest rates by 25 basis points to 3% and removed the “sufficiently restrictive” language, signalling a shift towards a more accommodative policy.
• Economic Outlook: The ECB projects Eurozone GDP growth of 1.1% in 2025, with risks stemming from political instability and external factors. The forecast assumes a recovery in consumer spending, but the outlook appears optimistic given broader global uncertainties and potential geopolitical tensions.
• Inflation & Policy Direction: Inflation is projected to decrease to 1.9% by 2026, with the ECB likely to implement further rate cuts to achieve a neutral range between 1.75% and 2.5%.

Technical Analysis

Let’s review the current market trends for the three major currency pairs: GBP/USD, EUR/USD, and USD/JPY. Each currency pair is examined to identify key support and resistance levels and potential trading opportunities and analyse the prevailing market sentiments.

Pound – Dollar (GBP/USD)

GBP/USD is clearly in a downtrend across both the daily and 4-hour timeframes, making selling opportunities more favourable. Given the prevailing bearish momentum, it is advisable to focus on short positions. The nearest resistance levels are at $1.26837 and $1.28589, while key support levels to watch are at $1.24940 and $1.23928.

Euro – Dollar (EUR/USD)

EUR/USD has been in a steady downtrend since late September and is currently testing the key support around $1.03093. The outlook for the major currency pair remains strongly bearish across all timeframes. It is advisable to wait for buying opportunities at support levels, with the target near resistance.

The nearest support is around the $1.03 round number level, and if this level fails to hold, the pair could drop to the next round number at $1. On the upside, the nearest resistance targets are $1.04779 and $1.06108.

Dollar – Yen (USD/JPY)

USD/JPY has resumed its uptrend, with the larger trend across the weekly, daily, and 4-hour timeframes showing strong bullish momentum. From a technical standpoint, entering buy positions at key support levels is advisable. Fundamentally, the BOJ’s current stance of maintaining interest rates, coupled with uncertainty around the timing of any future rate hikes, supports the prevailing upward momentum.

However, if the BOJ does proceed with an anticipated rate hike, this could lead to a stronger JPY, potentially causing USD/JPY to reverse and correct lower. It is important to stay alert to economic data and the BOJ’s next meeting to assess any changes in their policy stance. The nearest support for USD/JPY is around ¥154.103 and ¥150.694, while key resistance levels are found at ¥158.039 and ¥161.314.