How will central bank decisions in September reshape financial markets?

Major central bank meeting schedule

The upcoming weeks are packed with important economic events as the major central banks hold their monetary policy meetings. Their decisions will be announced at the following times:

• European Central Bank (ECB): 8.15pm (HK time) on Thursday 11 September
• Federal Reserve (Fed): 2.00am (HK time) on Thursday 18 September
• Bank of England (BoE): 7.00pm (HK time) on Thursday 18 September
• Bank of Japan (BoJ): 11.00am (HK time) on Friday 19 September

Traders should prepare for heightened volatility as markets digest policy statements, rate decisions and forward guidance. The coordination of these announcements creates unique trading opportunities but also amplifies risk across global markets.

ECB maintains cautious stance after eight rate cuts

The ECB is expected to maintain its current policy stance following eight interest rates cuts implemented since June 2024. At July's meeting, policymakers opted to pause, citing easing domestic price pressures and moderating wage growth as primary considerations.

Recent economic data reinforces this cautious approach. Eurozone headline inflation registered 2.1% year-on-year in August, while core inflation remained stable. However, the slight increase in headline inflation necessitates vigilance against potential renewed price pressures.

Trade dynamics with the US introduce additional complexity to the ECB's deliberations. Despite reaching a bilateral agreement in July, European exporters now face 15% tariffs on most goods entering US markets, significantly exceeding pre-agreement levels.

The tariff burden affects critical sectors including pharmaceuticals, automotive manufacturing and semiconductor production. Moreover, the agreement's implementation remains contingent upon EU elimination of levies on US industrial goods and provision of preferential agricultural tariffs. European automotive exports face particularly challenging conditions, with tariff rates of 27.5% persisting until EU legislative implementation occurs.

Geopolitical developments surrounding the Russia-Ukraine conflict present additional uncertainty for policymakers. Potential US pressure on the EU to impose tariffs up to 100% on Chinese and Indian imports could strain relationships with key trading partners. Such measures might undermine European efforts to strengthen global trade positioning amid escalating international trade tensions.

Consequently, the ECB is likely to maintain its pause in September, with high probability of unchanged policy through year-end. This measured approach reflects uncertainty surrounding trade policy impacts and inflationary dynamics across the eurozone.

Figure 1: The ECB might have found the right balance after eight cuts

Fed confronts deteriorating employment landscape

Labour market deterioration presents the Federal Open Market Committee (FOMC) with compelling rationale for monetary easing at next week's meeting. August non-farm payrolls additions reached just 22,000, substantially below the 75,000 consensus expectation.

This disappointing figure reduced the three-month average job creation to approximately 29,000 positions. Recent Bureau of Labour Statistics annual benchmark revisions suggest labour market weakening commenced earlier than previously recognised, with average monthly gains nearly halved through March 2025.

Unemployment has escalated to 4.3% in August, marking the highest level since October 2021. This deterioration strengthens arguments for accommodative monetary policy to support economic growth and employment recovery.

Markets anticipate a Fed rate reduction with near certainty, though debate centres on magnitude. A 25 basis point cut appears most probable, barring significantly softer inflation readings than July data suggesting Producer Price Index (PPI) growth of 3.3% and Consumer Price Index (CPI) expansion of 2.7% year-on-year.

Bond futures markets price 66% probability of three or more quarter-point reductions by year-end. This expectation reflects both labour market concerns and broader economic growth uncertainties facing the US economy.

Political pressures on Fed independence add complexity to monetary policy deliberations. The Trump administration has intensified criticism of Fed leadership, including public censure of Chair Powell's timing on rate cuts and controversial dismissal of Governor Lisa Cook over alleged mortgage fraud concerns. White House Chief Economic Adviser Stephen Miran will be facing Senate confirmation proceedings for his Federal Reserve Board position tonight. Meanwhile, Governor Lisa Cook maintains her role pending ongoing legal investigation.

These political dynamics introduce additional considerations beyond traditional economic indicators, potentially complicating the Fed's policy communication and implementation strategies.

Figure 2: US policy rates probabilities

BoE navigates inflation-growth trade-offs

The Bank of England's Monetary Policy Committee (MPC) delivered a 25 basis point rate cut in August, reducing the base rate from 4.25% to 4.00%. The decision required two voting rounds, highlighting significant disagreement among committee members regarding appropriate policy direction.

Policymakers must balance competing pressures as both headline and core inflation accelerated to 3.8% in July. Simultaneously, employment data revealed continued weakness with payrolled employee counts declining consecutively over the past six months, creating conflicting policy signals.

Rising long-term borrowing costs present additional challenges for the central bank's balance sheet normalisation efforts. UK 30-year gilt yields briefly touched 5.72% last week, representing the highest level since 1998.

Market consensus overwhelmingly expects policy rates to remain unchanged at September's meeting. However, year-end expectations remain divided, with probability assessments splitting 40% for cuts versus 60% for no change.

Any surprise dovish shift or accommodative guidance could trigger significant sterling weakness against major currencies. The BoE faces the delicate task of supporting economic growth while preventing inflation expectations from becoming entrenched above target levels.

Figure 3: UK's employment and inflation data

BoJ considers policy normalisation

Japan's economic conditions have improved from the challenging environment faced earlier this year. Core consumer price inflation has moderated from its May peak of 3.7% year-on-year to 3.1% in July across two consecutive months.

Economic growth has demonstrated notable acceleration, with annualised GDP expansion improving from 0.3% in Q1 to 2.2% in Q2. This improvement reflects robust private consumption and capital spending, although the effect from front-loading of export orders ahead of tariff implementations will likely wane next quarter.

These developments provide the Bank of Japan with stronger foundations for considering rate increases during 2025, although the central bank has adopted a cautious approach due to underlying price dynamics. The BoJ emphasises 'underlying inflation' measures have not consistently achieved the 2% objective, despite core inflation remaining above 2% since April 2022. Irrespective of which inflation definition proves more accurate, Japanese consumers face tangible impacts from higher prices as real wages have declined for six consecutive months since February.

Uncertainty surrounding potential US trade policy impacts on Japan's export-dependent economy represents another key consideration. The full consequences of the latest tariff framework remain unclear, creating additional complexity for monetary policy planning.

While the BoJ will likely maintain current rates at next week's meeting, any indication of potential 2025 tightening could provide substantial yen support.

Technical analysis of major currency pairs

EUR/USD demonstrates compelling technical momentum as it approaches horizontal resistance at 1.1795. A decisive breakthrough above this level would provide additional upward momentum for the established trend.

The relative strength index maintains a neutral reading of 52, suggesting scope for continued appreciation from valuation perspectives. Key support levels include the 50-day moving average at 1.1656 and August's low of 1.1391, providing downside protection.

Figure 4: EUR/USD (daily) price chart

GBP/USD continues trading within an ascending channel established in January. Following July's peak near 1.3788, the pair has consolidated within a defined range, testing both support and resistance boundaries.

Recent bounces from the channel's lower boundary at 1.3333 suggest the broader uptrend remains intact. A break above 1.3595 would target July's highs around 1.3788, while failure below 1.3333 would shift focus toward 200-day moving average support at 1.3190.

Figure 5: GBP/USD (daily) price chart

The yen has been on a weakening trajectory since April as political leadership instability and persistent rises in long-term bond yields weighed on the currency. However, the yen steadied as the US dollar weakened ahead of critical inflation data.

USD/JPY faces a critical technical juncture at the 148.8 level. Recent rejection at this point indicates the longer-term bearish trend established in January remains valid, though traders should monitor potential reversal signals.

The pair exhibits an ascending triangle pattern with horizontal resistance at 148.6. A breakthrough above this level would signal reversal of the dollar's bear trend, while support emerges around the 146 area during potential pullback.

Figure 6: USD/JPY (daily) price chart

Market implications and strategic considerations

The central bank decisions will have significant implications across various markets, with the Fed's announcement likely to drive the most substantial global impact. The Fed's policy stance influences dollar strength, US Treasury yields, and risk appetite across international markets.

Bond markets will respond substantially to interest rate decisions and forward guidance communications. Yield curve dynamics may experience significant shifts depending on central bank messaging and revised rate expectations.

Equity markets face mixed signals from policy divergence trends. While accommodative monetary policy typically supports asset valuations, underlying economic weakness that necessitates easing could weigh on investor sentiment.

Commodity markets, particularly precious metals, often benefit from accommodative monetary policy environments. Trading opportunities may develop as real yield dynamics shift across major economies.

Risk management assumes paramount importance during periods of heightened volatility surrounding central bank announcements. Position sizing and stop-loss implementation should reflect increased uncertainty and potential for gap movements.