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Hello everyone, today XM Forex will bring you "[XM official website]: The Federal Reserve policy changes, global central bank dynamics affect financial markets". Hope this helps you! The original content is as follows:
The Federal Reserve policy changes, and global central bank dynamics affect financial markets
The Federal Reserve is not hawkish enough, causing the dollar to suffer
The high-profile December Federal Reserve decision-making meeting has www.vifu.nete to an end. At this meeting, www.vifu.netmittee members had serious differences of opinion. This situation prompted investors to sell the U.S. dollar. The www.vifu.netmittee ultimately cut interest rates by 25 basis points as expected, but the updated dot plot shows only one rate cut planned for next year.
On the surface, this rate cut can be regarded as a hawkish rate cut. After all, two lawmakers voted to keep interest rates on hold, and six officials indicated their preference for keeping rates at this year's level.
However, interest rate trends in 2026 are widely and evenly distributed. Four members advocated no rate cuts in 2026, four supported one forecast and four wanted two rate cuts. Therefore, the median interest rate in 2026 does not represent the majority opinion, but is the average of these three forecasts with the same level of support.
More importantly, the www.vifu.netmittee announced that it will begin purchasing short-term Treasury bills as part of its reserve management efforts to support market liquidity and maintain effective control over interest rates.
In addition, Fed Chairman Powell's performance at the press conference was less hawkish than market expectations. He highlighted slowing job growth and uncertainty in the labor market as the main reasons for the dollar's decline. Investors remain convinced that the Fed may need to cut interest rates twice next year.
Non-farm and CPI data will affect the Federal Reserve’s interest rate bets
This week, the market focus will most likely be on the November non-farm employment data (NFP), which is expected to be released on Tuesday after being delayed due to the government shutdown.), as well as consumer price index (CPI) data for the same month (expected to be released on Thursday). ADP's November report showed that the private sector lost 32,000 jobs, far short of the 5,000 job gains expected by analysts, tilting risks to the downside for the NFP report.
Even if the CPI data further reflects the stickiness of inflation, the Fed still seems to be prioritizing the labor market. Powell pointed out on Wednesday that the current overshoot of the 2% inflation target is mainly due to tariffs and that this is likely to be just a "one-time price increase." Therefore, the inflation data is unlikely to www.vifu.netpletely reverse the dollar's weakening trend triggered by Tuesday's non-farm payrolls report.
In addition, preliminary S&P Global Purchasing Managers' Index for December and retail sales data for November will also be released on Tuesday and Wednesday respectively.
The Bank of England is about to cut interest rates, are expectations for an interest rate cut in 2026 rising?
In addition to the impact of the Federal Reserve policy and the key non-farm employment and consumer price index data in the United States, investors will also need to pay attention to the dynamics of three other central banks this week: the Bank of England and the European Central Bank on Thursday, and the Bank of Japan on Friday.
British policymakers www.vifu.netmunicated and negotiated with the Bank of England, and voted 5 to 4 in November to keep interest rates unchanged. Four opponents supported an interest rate cut. Governor Bailey was the only one among the five to support the decision to suspend interest rate increases. He pointed out that the overall inflation risk had declined. This is likely to be interpreted as a sign that Bailey will join those hoping for a rate cut at Thursday's meeting.
Since the last meeting, data show that the unemployment rate rose from 4.8% to 5.0% in September, economic growth fell from 0.3% to 0.1% in the third quarter, and both overall and core CPI declined slightly, but they are still above 3%.
Based on these circumstances, investors currently expect that the probability of an interest rate cut next week is as high as 90%, and that by December 2026, the probability of another interest rate cut has also been fully factored in. It is worth mentioning that the Bank of England predicts that the latest budget plan announced by Finance Minister Reeves will reduce the annual inflation rate by about 0.4 to 0.5 percentage points from the second quarter to the end of 2026.
Therefore, an interest rate cut accompanied by a dovish signal may prompt investors to anticipate the next interest rate cut in advance, and may even add more basis points of interest rate cuts for next year. Such an outcome could put downward pressure on the pound.
A lot of UK data will be released before the Bank of England makes its decision. The October jobs report and preliminary PMI for December will be released on Tuesday, followed by CPI and retail sales data on Wednesday and Friday respectively. If two consecutive rounds of inflation data slow down, it may strengthen market expectations for a dovish stance the next day, and may even trigger a fall in the pound before the Bank of England announces its decision.
The European Central Bank may maintain the status quo and GDP forecasts may be raised
About an hour after the Bank of England announces its monetary policy decision, the European Central Bank will announce its decision. At the previous meeting, ECB policymakers kept interest rates unchanged and reiterated thatPolicy is in "good shape" as the economy shows signs of health and inflation is close to target.
This week, European Central Bank President Lagarde said that the euro zone economy’s resilience to trade tensions and near-potential growth levels may prompt the central bank to raise its GDP forecast at next week’s meeting. Taking things a step further, ECB board member Isabelle Schnabel told Bloomberg News on Monday that the central bank's next move could be to raise interest rates, although that won't happen in the short term.
Taking these factors into account, investors expect the European Central Bank to maintain the status quo next week and believe that the probability of raising interest rates by the end of next year is 36%. Therefore, a reaffirmation of upbeat messages could help EUR/USD move higher, especially if Tuesday's quick S&P Global Purchasing Managers' Index (PMI) confirms the view that the Eurozone economy is performing well.
The Bank of Japan is expected to raise interest rates, and forward guidance has attracted attention
Finally, the Bank of Japan currently predicts a 75% probability of raising interest rates. As for next year, investors expect another 40 basis points in interest rates, which means that interest rates will be cut by another quarter of a basis point, and there is a 60% probability of one-third.
After fiscal dovish Sanae Takaichi was elected as the new prime minister, investors reduced their bets on an interest rate hike in December. However, Governor Ueda’s recent remarks and reports from Bloomberg and Reuters have reignited market speculation on interest rate hikes. However, the yen failed to take full advantage of the rise in hawkish expectations and strengthened significantly.
Therefore, if the central bank raises interest rates as expected, market attention will quickly turn to its hints and clues about its policy advancement plan in 2026. If policymakers fail to keep up with the market's latest hawkish turn, the yen is likely to continue its current downward trend. However, as USD/JPY approaches the psychological range of 160.00, Finance Minister Katayama may again publicly express concerns about yen depreciation and may even mention the possibility of intervention. This means that even if the Bank of Japan disappoints market participants with its decision on Friday, the upside risks surrounding the yen are unlikely to disappear.
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