Following the Federal Reserve’s recent rate cut in December, attention turns to the Bank of England (BoE), the European Central Bank (ECB), and the Bank of Japan (BoJ) this week. Expectations include a rate cut from the BoE, the ECB keeping rates the same, and a gradual increase from the BoJ as global growth remains steady and central banks act cautiously. All three banks are meeting this week after the Fed’s monetary policy adjustment on December 10. The BoE is likely to lower its key interest rate, the ECB is expected to maintain its current rates, and the BoJ may raise rates slowly.

Pressure on Long-Term Sovereign Rates

This neutral approach to monetary policy could increase pressure on long-term sovereign rates, which contrasts with previous easing periods. These decisions come amid consistent growth despite various economic challenges. Central banks are expected to be cautious, deciding to maintain or slowly change interest rates based on the economic landscape. Today is December 17, 2025. The Federal Reserve seems to be pausing after its third rate cut last week. Recent data showed that US inflation eased to 2.5% and unemployment rose slightly to 4.1%, justifying the Fed’s hold on rates. This indicates the US dollar may start to lose strength as we look at other central banks this week. We expect the Bank of England to cut its key interest rate to support a weak UK economy, which only grew by 0.1% in the third quarter of 2025. While the ECB is likely to hold rates steady, this creates a clear difference in policy. Traders might consider options that would benefit from a weaker pound against the euro, such as EUR/GBP call options. A key event may be the Bank of Japan finally raising its interest rate, as domestic inflation has remained above its 2% target for six months. Such changes from the BoJ typically lead to significant currency fluctuations. We suggest preparing for a stronger yen against the US dollar, possibly by buying USD/JPY put options.

Impact on Long-Term Bond Yields

The differing policies among central banks are likely to put upward pressure on long-term government bond yields. As the coordinated easing period concludes, we could see a decline in bond prices. Traders should consider shorting long-dated government bond futures to take advantage of rising yields. Overall, the mixed signals from major central banks are increasing uncertainty in the market. We experienced a similar divergence back in 2015-2016, which led to higher market volatility. This suggests that buying options to bet on increased price fluctuations in major currency pairs could be a wise strategy in the coming weeks. Create your live VT Markets account and start trading now.

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