Top Story

Three down, one to go – Bank of Japan next in central bank lineup

In this week’s market-moving lineup of four central banks – the US Federal Reserve, Swiss National Bank, Bank of England, and Bank of Japan – the first three have spoken rather loudly and clearly, and markets are now waiting on the BoJ as the last major decision for the week. The Bank of Japan will be issuing its statement early on Friday, and yen traders are waiting in high anticipation.

Fed’s hawkish surprise

The Fed surprised markets on Wednesday with a statement that was more hawkish than expected. As it raised interest rates by 25 basis points, in-line with expectations, it also maintained its relatively hawkish rate outlook at three rate hikes this year (inclusive of the rate increases from yesterday and in March) as well as three next year. This outlook was maintained despite declines in inflation and job gains in recent months. In a further push to normalize and tighten policy, the central bank also announced plans to begin reducing its balance sheet this year, more quickly than expected. This hawkish stance pushed the previously struggling US dollar higher in the aftermath of the announcement, and the dollar rally continued into Thursday.

SNB fails to move the needle

The Swiss National Bank statement on Thursday morning, in contrast, was rather uneventful. No major policy changes were made, as expected, and the central bank once again repeated its oft-stated assertion that “the Swiss franc is still significantly overvalued.” While the SNB did acknowledge strength in the global economy and some modest improvements in the Swiss economy, inflation forecasts fell moderately. The Swiss franc was little changed as a result.

Inflation pressuring BoE to tighten

Like the Fed, the Bank of England on Thursday surprised to the hawkish side, as markets got the sense that interest rates in the UK would potentially rise sooner than expected. In the case of the BoE, higher inflation was the primary driver of this more hawkish tone. While the official bank rate was kept unchanged as widely expected, a higher-than-usual three Monetary Policy Committee (MPC) members voted unsuccessfully for a rate hike. This was seen in stark contrast with the May MPC meeting, during which only one member voted to hike. As a result of the current boost in hawkishness, the British pound surged against both the euro and Japanese yen, but was relatively balanced against the concurrent rise in the US dollar.

BoJ to remain unchanged, but stimulus outlook will be key

The yen fell broadly on Thursday ahead of the Bank of Japan’s Friday statement. The BoJ is expected to keep monetary policy essentially unchanged, holding its key policy rate unchanged at -0.10%, maintaining its 10-year JGB yield curve control program at around 0%, and continuing its ongoing asset purchase program. In its last meeting, the BoJ raised its economic growth forecast but lowered its near-term inflation outlook. The yen’s strength within the past month may pose a concern to the BoJ, and the central bank could potentially subdue rumors that it intends (or will be forced) to start winding-down its extensive stimulus program. If the central bank indeed brushes of such notions of tapering, the yen could be pressured. If combined with the Fed-driven strength in the US dollar, any potential pressure on the yen could spark a USD/JPY rebound, which could then help buck the current downtrend and push the currency pair towards a potential upside breakout.

Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.

The markets are moving. Stop missing out.