The three main central bank policy decisions to watch this week will be the Fed (Wednesday), ECB (Thursday), and BOJ (Friday). So, what are markets expecting and is there any room for surprises to follow?

  • Fed funds futures are showing a near 100% pricing for a 25 bps rate hike as seen here
  • Money markets are also pricing in a near 100% pricing (99.8%) for the ECB to raise rates by 25 bps
  • After Ueda tempered with market expectations, the view now is that the BOJ isn't going to tweak policy

So, among all of that, what is the propensity for each central bank to surprise?

Let's just get the ECB out of the way as a 25 bps rate hike is very much a given. It will not be anything else but that and the central bank is likely to adhere with its more data-dependent communication and leave the door open for another move in September, without explicitly confirming it.

Then, we have the Fed. As much as I'd like to think that Powell & co. might surprise us, they did not do anything to push back or tone down market expectations on a 25 bps rate hike when they had the chance earlier this month. The softer inflation numbers for June threw a bit of a curveball to market players but policymakers should play it straight this week.

In essence, it reaffirms their conviction that June was indeed just a "skip" and that they are committed to keeping rates higher for longer in order to press down inflation pressures.

That means the central bank that could really and truly surprise markets this week is definitely the BOJ.

ueda Bank of Japan

Since Ueda took over as governor, yen bulls have been set up for disappointment since April and this looks to be another case in point. He spoke last week to maintain that they are committed to easy policy, which dashed the hopes of market players hoping that he would have teed something up for a policy tweak this week.

In the past few weeks, there were certain quarters in the market thinking that this would be the time for the BOJ to act. But those calls have gone silent again now, with the yen currency itself dropping heavily last week as a result.

As such, if the BOJ really does surprise, it would be rather inconsistent with the message from last week (and recently), which will make that a real surprise if they do perform a tweak on their yield curve control (YCC) policy.