Week Ahead: Fed, BoE and BoJ rate decisions as inflation risks rise

The USD jumped 0.7% against its major peers last week, whilst U.S. stocks finished the week modestly lower. Escalating tensions in the Middle East, fueled by a 5% jump in oil prices, which combined with President Trump's decision to apply new tariffs, have revived inflation concerns ahead of this week’s FOMC meeting.

While June inflation data showed US CPI eased by more than expected in June, the revival of hostilities in the Middle East and the closure of the Strait of Hormuz means inflation concerns and treasury yields are rising.

FOMC rate decision in focus

With this in mind, attention will be firmly on the Fed's Wednesday interest rate decision. The market is pricing in a 35% probability that the Fed will hike rates, up significantly from 12% just 10 days ago, and a hike is 80% priced in by September.

Even if the Fed doesn't lift rates this week, any hints towards a move in September could further lift the US dollar, with Treasury yields also moving higher. At the same time, non-yielding U.S. dollar-denominated gold could come under pressure.

In the case the Fed did choose to hike, the reaction would be as above, but only magnified as the path for rates becomes much steeper.

However, given Kevin Walsh's dislike for providing clear signals and forward guidance, the market may struggle to arrive at any firm conclusion. U.S. core PCE, the Fed's preferred go-to inflation, will be released the day after the Fed meeting.

Could the BoE hint at a September hike?

On Thursday, the Bank of England will announce its rate decision. The UK central bank left rates unchanged at a 7-2 vote in the June meeting, with the two dissenters voting for a 25 basis point hike.

The statement suggested that policymakers are in no rush to raise interest rates, and while headline CPI was cooler than expected in June, core CPI remained unchanged at 2.6%, still ahead of target. This, combined with rising oil prices, could set policymakers on a more hawkish path towards a September move, supporting GBP.

The market is currently pricing in around a 75% expectation of a September hike, with a 25 basis point move being fully priced in by December.

Can the BoJ save the yen?

 The BoJ is set to announce its rate decision on Friday, after hiking interest rates to 1% in the June meeting, the highest level in three decades. The BoJ signaled that it expects CPI to accelerate beyond the 2% target before easing back in the second half of fiscal 2026 and 2027.

Since the meeting, several policymakers have adopted more hawkish tones. Reports have also circulated that BoJ officials could be considering raising rates faster than previously expected if inflationary pressures accelerated further. Core CPI rose to 1.6%in June, creeping up from a 4-year low but still well below the BoJ’s 2% target.

The market has priced in 25 basis points of hikes by the end of the year. Even so, the yen has struggled considerably, trading at fresh 40-year lows versus the US dollar. Despite the BoJ sounding more hawkish, Prime Minister Takaichi still calls for interest rates to remain low. With USD/JPY around 163.00, Japanese officials remain on intervention watch. However, even recent interventions appear unable to change the yen's fate.

Aussie, Eurozone CPI

In addition to a wave of central bank meetings, attention will also be on Australian inflation data for Q2, as well as Eurozone Inflation figures. With revived tensions in the Middle East and higher oil prices, inflationary concerns are front and central. The market is pricing in a 40% chance of a rate hike at the next RBA meeting, and the ECB could also hike in September.  Hot inflation could fuels these expectations.

Watch: AUS/USD, EUR/USD, EUSTOCKS

Tech stock earnings

Besides central banks and data, earnings from megacap tech stocks Microsoft, Meta, Amazon, and Apple, will be in focus, particularly after Alphabet’s capex figures spurred a sharp selloff last week.

Watch: Nasdaq 100, S&P 500