Fed, BoE and BoJ: three different monetary cycles and potential FX impact

Fed, BoE and BoJ: three different economies and three different policies

The Federal Reserve, the Bank of England and the Bank of Japan all hold monetary policy meetings this week, with the Fed due on Wednesday 29 July, the BoE on Thursday 30 July and the BoJ on Friday 31 July.

The central scenario points to a pause in all three cases. Consensus expects the Federal Reserve to keep rates in the 3.50%-3.75% range, the Bank of England at 3.75% and the Bank of Japan at 1%.

Behind that apparent calm, however, sit very different realities. While the Fed is debating whether the recent energy shock could delay the disinflation process, the Bank of England appears willing to buy time before making its next move. In Japan, by contrast, the main concern is the impact of yen depreciation on imported inflation.

Fed: markets are divided, but a hawkish hold remains the central case

The market is divided ahead of the Fed's Wednesday decision, due at 20:00, followed by Kevin Warsh's press conference at 20:30. Fed funds pricing implies a 68.5% probability that rates stay at 3.75%, while the probability of a 25-basis-point increase to 4.00% stands at 31.5%.

Warsh's shift towards a more restrictive stance, the move away from forward guidance and divisions within the FOMC help explain the current uncertainty, which could become the norm over the next few meetings.

A rate hike cannot be ruled out. The market has already priced in part of that move, and Warsh would send a strong signal about his commitment to fighting inflation. Such a move could help restrain the rise in longer-dated yields, leading to a flatter curve.

At the same time, the Fed could choose to save the hike currently priced for after the summer, avoiding the need to act closer to the midterm elections, when such a move could prove more politically sensitive. That stance would likely increase market uncertainty, lift equity volatility and favour flows into the US dollar and longer-duration bonds, again supporting a flattening of the yield curve.

The most likely outcome, as priced by most of the market, is a hawkish hold: no rate change, but a firm tone. Despite high energy-price volatility, average oil prices remain moderate, with the average WTI price in July below USD 80 per barrel, while natural gas prices continue to fall.

Inflation data have also been surprising positively, and the Cleveland Fed's real-time inflation model suggests prices could continue to ease, confirming the May peak.

Fed funds moves priced for December 2026 and ISM weighted-price components

Number of 25-basis-point Fed moves priced for December 2026 Fed Funds futures and weighted price components from ISM surveys. Source: TradingView, 27 July 2026.

BoE: consensus points to a pause

The situation is very different in the UK. The Bank of England decision is due on Thursday at 1pm, followed by Andrew Bailey's press conference at 13:30.

SONIA futures imply a 96.2% probability that the Bank of England keeps rates at 3.75%, although the market still sees one final 25-basis-point increase after the summer.

Since the June meeting, inflation has moderated to 2.6% in both headline and core terms, while activity indicators have shown some recovery after the energy shock. Growth remains weak, but the backdrop allows the Bank of England to maintain a wait-and-see strategy.

Unless Andrew Bailey makes a meaningful change in tone, the impact on sterling should be limited. GBP/USD is likely to depend more on the comparison with the Federal Reserve than on the Bank of England decision itself. A relatively more cautious message could favour a move towards the lower end of the sideways range in which the currency has traded over recent quarters.

GBP/USD weekly chart with ATR % (5)

GBP/USD, weekly, with ATR % (5). Source: TradingView, 27 July 2026

BoJ: the yen puts Ueda to the test again

The Bank of Japan faces a completely different challenge. Its rate decision is due on Friday at 5am, followed by Kazuo Ueda's press conference at 8.30am.

TONA futures imply a 96% probability that rates remain at 1%, prolonging a monetary normalisation process that continues to move much more slowly than in other developed economies.

However, the combination of a sharp rise in natural gas prices and a yen sitting at lows not seen since 1986 is increasing pressure on imported inflation. The JKM contract has risen by almost 40% in July, reaching annual highs above USD 22/MMBtu. That move is especially relevant for an economy so dependent on energy imports.

If Kazuo Ueda shows greater concern about these pressures, the market could bring forward the next 25-basis-point hike to September. A change in tone would also support a closing of short yen positions, which remain elevated.

By contrast, if the Bank of Japan keeps an accommodative message and continues to act behind the curve, pressure on the Japanese currency could persist over the coming months.

JPY/USD and leveraged funds net positioning

JPY/USD and the net balance of leveraged funds in CME options and futures markets. Source: TradingView, 27 July 2026