Central bank meetings take centre stage this week, with financial markets hoping that the FOMC, BOE and BOJ can fill in some of the blanks with regards to the global interest rate picture between now and year-end. The FOMC is up first and should the US central bank focus on the tamer inflation readings and sluggish manufacturing sector, then we may indeed get a not-so-subtle hint that a September rate cut is on the way. However, the uptick in the latest GDP data and a still-healthy looking jobs market could give the Fed justification to remain measured and therefore keep markets guessing. While a September rate cut remains fully priced in by financial markets, the big question is what comes after that? So, there will be a lot of trying to read between the lines when it come to the Jerome Powell press conference to ascertain how many rate cuts the Fed may be eyeing off between now and year-end.
While the FOMC is expected to stay on hold this month, things could well be different at the BOE (Bank of England) and BOJ (Bank of Japan) meetings. There is great intrigue surrounding both meetings as the decision to either cut or hold in the case of the BOE, and the decision to hold or to raise rates in the case of the BOJ, is a coin flip at best. For the BOE, the argument to cut rates this month is that the CPI rate is now bang on target at 2%. On the flip side, there is an argument to me made that they should hold steady this month (and potentially cut in August instead) given that services inflation is not yet contained and therefore still poses upside risks to overall CPI moving forward.
The BOJ meeting likewise is probably going to be a contentious one. Murmurs that the BOJ could be aggressive in raising rates this week have helped the yen significantly. And when looking at the latest CPI readings for Japan being well above the historical trend, an argument can be made that the time is ripe to raise rates again (after the March raise). However, this could be countered by concerns that GDP growth remains subdued, and that lacklustre real-wage growth could cause inflation to eventually trail-off again.
Overall, with central bank meetings coming thick and fast this week, it’s fair to say this may well add another layer of volatility to financial markets. Particularly if we see some policy divergences emerge between the key players (i.e. between the central banks themselves).
In FX, the Dollar Index (DXY) continues to hold firm around the 104.50 level, and any deviation from here will probably come down to how dovish or otherwise the FOMC sounds following the meeting. Gold has managed to prop back above the $2400 level after languishing for a few days. The tone of the Fed will tell the story for both gold and the USD this week, with both assets likely to have opposing reactions to whatever guidance is given for the interest rate trajectory. Short-term levels to watch for gold include resistance at $2439 and further out at $2474, while support sits at $2388 and $2366.
Elsewhere, oil has been impacted by concerns of soft Chinese demand, which has put the crude price under pressure. There has been almost no reaction by the oil market to escalating tensions and actions this week between Israel and Hezbollah, which shows that demand concerns are far-outstripping supply concerns. Whether this dynamic continues to play out remains to be seen.
After the central bank meetings conclude we then have US Non-farm Payrolls (NFP) data to cap off the week. NFP releases are usually lively events and perhaps even more so when they come hot on the heels of a Fed meeting. If we happened to get a dovish Fed followed by a hot jobs number that could throw a spanner in the works regarding the interest rate picture. And that’s just one possible scenario. Let’s see how it all plays out.
