First Light News: Barrage of Central Bank Updates Ahead

Benign US Inflation Cements Fed Rate Cut

We were gifted with US government data last Friday: the September US CPI inflation report. However, don’t get your hopes up for October’s figures. The White House announced that this will probably not be released due to the ongoing government shutdown, which, as of writing, has entered its 27^th day. This is close to the 35-day record set by Trump in 2018, and sadly, a resolution seems unlikely at this point.

US inflation came in lower than economists had anticipated, and, given that tariff pass-through was relatively moderate, this has helped seal the deal for another 25-bp rate cut this week, in line with the recent SEP. This will reduce the target rate to 3.75% – 4.00%, from 4.00% – 4.25%. The Fed is also expected to end QT, or at least signal a decision to do so, in the near future. While another rate cut in December remains likely amid the slowdown in job growth (and nearly another two cuts by June next year), this week’s forward guidance will likely echo a cautious stance given the lack of official government data.

With a rate cut baked in, I will be closely watching the Fed’s language. Should Powell emphasise caution and highlight upside inflation risks, this could further strengthen the USD and provide a short-term scalping opportunity on the day. The 99.56 high formed on 9 October on the USD index could serve as an obvious upside target; a dovish tone will naturally have the opposite impact.

BoC, ECB, and BoJ Decisions on Deck

BoC: Approaching the lower boundary of the neutral target range

Just ahead of the Fed meeting on Wednesday, the BoC will make the airwaves. Markets anticipate the Canadian central bank will lower the overnight policy rate by 25 bps to 2.25% – striking the lower boundary of the nominal neutral target range (2.25% – 3.25%).

With growth and employment concerns key for policymakers, and BoC Governor Tiff Macklem downplaying the recent upside surprise in the September job growth, a cut will likely be seen this week. However, the September inflation print makes the decision less straightforward. Headline YY CPI data rose by 2.4% (from 1.9% in August), though the three-month average remains under 2.0% and the BoC’s preferred measures remained relatively grounded just north of 3.0%.

If a 25-bp cut is accompanied by dovish commentary, expect the CAD to be sold off; alternatively, a hawkish cut – meaning the guidance suggests the bank could be on hold going forward – could suggest a CAD bid.

ECB: Holding the line

Unlike the Fed and BoC, I expect little from the ECB this week, leaving the deposit rate at 2.0% – the middle of the ECB’s neutral rate, between 2.25% and 1.75%. With inflation around the 2.0% target, unemployment at historic lows, and growth gradually ticking up, I do not see any reason for the central bank to adjust policy at this point.

I am expecting forward guidance to reiterate that policy is in a ‘good place’. Additionally, I anticipate that the central bank will continue to adopt a data-dependent, meeting-by-meeting approach while avoiding any pre-commitment to a future rate path.

Should the ECB emphasise its neutral stance, this could add to EUR/USD longs, particularly if the Fed echoes a dovish stance.

BoJ: Political constraints

Many desks expect the BoJ to keep its policy rate unchanged at 0.5% this week, a decision that may be influenced by the new political environment under Prime Minister Sanae Takaichi, who advocates expansionary fiscal and monetary policy. There are concerns that a hike at this point could cause friction with the new administration and complicate their fiscal plans. Additionally, BoJ officials remain cautious about current US economic conditions and the re-escalation of US-China trade tensions.

Despite the hold, underlying conditions support the BoJ’s long-term push toward normalisation. With inflation above the 2.0% target – September core CPI rose by 2.9% (from 2.7% in August) – and dissenting voices growing, calling for a rate hike to 0.75%, this suggests future rate hikes are likely.

While Governor Ueda is expected to maintain a cautious, data-dependent stance without committing to a specific timing for a rate hike due to the new political climate, consensus now points to the next hike in December or January 2026. The BoJ will also release its Quarterly Outlook Report, which will include updated growth and inflation forecasts. Any upward revisions to inflation projections could help strengthen the case for rate hikes.

The decision to hold rates will likely support JPY weakness and push USD/JPY higher, extending the uptrend since April this year. Nevertheless, any unexpected hawkish signal from Governor Ueda could trigger a sharp reversal given Japan’s widening interest rate differential with the US.

That’s it from me this morning; have a great week ahead!

Written by FP Markets Chief Market Analyst Aaron Hill