Central Banks Brace for Hawkish Moves Amid Energy-Driven Inflation, But Dovish Surprises Remain Possible

Energy-Driven Inflation and Central Bank Responses

As of October 26, 2026, five major central banks—the Bank of Canada (BoC), Federal Reserve (Fed), Reserve Bank of New Zealand (RBNZ), European Central Bank (ECB), and Bank of Japan (BoJ)—are preparing to announce monetary policy decisions amid heightened inflationary pressures. The global energy shock, largely stemming from disruptions in Middle Eastern oil supplies and restrictions through the Strait of Hormuz, has pushed headline inflation above target levels in many economies. This has led markets to anticipate further interest rate increases as central banks seek to contain inflation.

However, the inflation picture varies significantly across regions. In the Eurozone, headline inflation reached 3.8% year-on-year in September, with energy accounting for about 1.71 percentage points or 45% of the increase, while core inflation remained at a lower 2.5%. Canada shows a similar divergence: headline Consumer Price Index (CPI) inflation was 3.1% in September, but inflation excluding gasoline was 2.2%, and the BoC’s preferred underlying measures (CPI-trim and CPI-median) stayed below 2%. The United States presents a more complex scenario, with headline inflation at 3.7% in September and the Fed’s core Personal Consumption Expenditures (PCE) inflation at 3% in August, indicating broader price pressures beyond energy.

Monetary Policy Challenges and Potential for Dovish Surprises

Monetary policy tools primarily influence demand by making borrowing more expensive and slowing economic activity. However, they do not directly address supply-side shocks such as energy disruptions. This raises concerns that aggressive rate hikes could unnecessarily weaken economic growth if inflation pressures from energy prices prove temporary and subside as markets stabilize.

Julian Howard, Chief Multi-Asset Investment Strategist at GAM Investments, cautioned about the limitations of using interest rates to combat energy supply shocks, emphasizing the risk of over-tightening. This suggests that despite market expectations for hawkish moves, some central banks might adopt a more cautious or dovish stance if they judge that inflation pressures are transitory or concentrated in volatile energy components.

FXVNPro Market Perspective

From a forex market perspective, central bank policy decisions amid energy-driven inflation shocks can lead to increased volatility. If central banks deliver on hawkish expectations by signaling or implementing higher interest rates, currencies of those economies may strengthen due to higher yield attractiveness. Conversely, if central banks surprise markets with a more dovish approach—acknowledging the temporary nature of energy inflation or signaling a pause in tightening—this could weaken their currencies as investors adjust growth and inflation expectations downward.

Market transmission mechanisms depend on how inflation components are interpreted. For example, if core inflation remains subdued, central banks may prioritize growth stability over aggressive tightening, influencing currency valuations accordingly. Additionally, geopolitical developments affecting energy supply routes remain a key risk factor that could alter inflation trajectories and central bank responses.

Trading Scenarios

• If central banks emphasize persistent inflation risks driven by energy prices and signal or implement further rate hikes, then currencies like the Canadian dollar and euro could strengthen, reflecting tighter monetary policy expectations.
• If central banks highlight the transitory nature of energy-driven inflation and adopt a less restrictive stance than markets anticipate, then these currencies may weaken as growth concerns and lower rate expectations take precedence.

What Traders Should Watch

• Central bank communications for indications of how much weight is given to energy-driven inflation versus core inflation.
• Geopolitical developments impacting energy supply routes, especially in the Middle East.
• Inflation data releases distinguishing headline versus core measures to assess underlying price pressures.
• Market reactions to policy decisions, particularly any divergence from hawkish consensus expectations.

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