Central Banks Signal Diverging Paths Amid Inflation Slowdown

Global financial markets turned their attention to Sintra on Monday as key central bank leaders — including Fed Chair Jerome Powell, ECB President Christine Lagarde, BoE Governor Andrew Bailey, and BoJ Governor Kazuo Ueda — shared their latest policy perspectives during the ECB’s annual Central Bank Forum in Portugal.

While all four acknowledged the progress in taming inflation, the forum exposed clear divergences in the pace and confidence of potential rate cuts, reinforcing that the path to policy normalization remains uneven across regions.

Fed’s Powell & ECB’s Lagarde: “Data-Dependent” Path Forward

U.S. Federal Reserve Chair Jerome Powell struck a cautious but slightly dovish tone, noting that while inflation is trending in the right direction, the Fed still needs to see “more good data” to gain confidence that inflation is sustainably heading back to the 2% target.

“We are making progress, but not declaring victory,” said Powell, keeping the door open for a possible rate cut as soon as September, if upcoming jobs and inflation data continue to show improvement.

Similarly, ECB President Christine Lagarde reaffirmed the central bank’s data-dependent approach, stating that while goods inflation has eased, services inflation remains sticky. She emphasized that there is “no predefined path” for rate cuts and that policy will remain flexible and conditional on future data.

Markets are still assessing whether the ECB will deliver another cut by September. Lagarde’s remarks suggest that a cut remains possible, but only if price pressures continue to ease further in the months ahead.

Meanwhile, the probabilities for Fed cut in September holds at 71.8%, according to CME FedWatch.

September Fed Cut Probabilities | Source: CME Fedwatch

BoE’s Bailey: “No Green Light Yet”

Bank of England Governor Andrew Bailey maintained a cautious and hawkish stance, stating that while UK inflation has declined sharply, persistent wage growth and service sector inflation remain a concern.

“We are not yet at a point where we can safely say inflation is back under control,” Bailey said.

His tone disappointed markets hoping for a summer rate cut. GBP firmed slightly after his comments, as expectations for a BoE rate cut shifted further into Q4.

BoJ’s Ueda: “Too Early for Aggressive Tightening”

Bank of Japan Governor Kazuo Ueda highlighted Japan’s continued progress in wage growth, but suggested the BoJ would move slowly on normalizing policy, citing the need for more consistent evidence of sustained inflation above 2%.

“We are still watching for signs that inflation is truly embedded,” Ueda said.

The yen weakened slightly after his comments, as markets interpreted the stance as dovish, reinforcing that Japan remains the global outlier in monetary policy.

Setting the Stage for FX Market Shifts

While the overall tone from major central bank leaders remained largely unchanged from their previous meetings, policy paths now appear to be diverging, laying the groundwork for potential shifts in FX dynamics.

Although immediate market reaction was muted, traders are now turning their focus to what comes next. In general:

• U.S. Dollar remains under pressure amid ongoing fiscal concerns and trade uncertainty. Weakness could extend further if this week’s U.S. labor data disappoints.
• Japanese Yen continues to trade heavy as the Bank of Japan stays dovish, but with the Yen hovering near major technical support, any shift in tone or yields could trigger volatility.
• Euro and Pound remain volatile as both the ECB and BoE balance easing inflation trends with sticky wage pressures, creating uncertainty around the pace of further policy easing.

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