Central Banks Meet Hawkish Repricing and Rising Energy Prices

The upcoming week will be dominated by central bank decisions from both the Federal Reserve and the Bank of Japan, but it's not just about the rate hikes themselves. The Fed's decision to raise rates is largely priced in, but the Bank of Japan's move to increase its key interest rate is fully expected.

For the Fed, the focus will be on the updated Summary of Economic Projections and the dot plot, which will give markets a better idea of where the committee sees the economy heading. A 25 basis point hike is widely expected, but any sign of dissent from influential members could spark a dovish market reaction.

The BOJ's decision to raise rates will be closely watched as it tries to sustain the hawkish shift in expectations that has taken place over the past month. OIS pricing has moved materially higher across the curve, with almost a second hike by year-end now priced and more than three hikes expected by the middle of next year.

However, the true swing factor that could override all central bank discussion is energy prices. With a tight link between movements in oil and US Treasury yields, as well as a strong relationship between US Treasury yields and the US dollar, how energy prices evolve will be equally important in determining how USD/JPY performs.