After Monday’s uncertainty, markets remain volatile early Tuesday with investors being cautious ahead of this week’s key central bank meetings. The moderate improvement in risk mood has pushed the US dollar (USD) lower during the American trading hours on Monday.
GBP/JPY has gained slightly ahead of the Bank of England (BoE) and Bank of Japan interest rate decisions on Thursday and Friday, respectively. The BoE is expected to raise the rate to 5.5% from 5.25% at Thursday’s meeting, while the BoJ is likely to hold its short-term rate target of -0.1% and its 10-year bond yield target of around 0%. These key central bank events could trigger further volatility in the market.
Traders anticipate that the Bank of England (BoE) will raise the rate to 5.5% from 5.25% at Thursday’s meeting. The economic data releases in the UK last week support Governor Andrew Bailey’s statement this month that the BoE is closer to ending its tightening cycle. However, UK inflation data due out Wednesday is expected to show that price gains rose higher to 7% last month from 6.8% in July, according to a Bloomberg survey. It would mark the first increase since February, with economists attributing the acceleration to fuel price fluctuations. The release will complicate the BoE’s decision as policymakers will meet the next day to decide whether to raise rates for possibly the last time of the cycle. At the same time, fears of recession from aggressive rate hikes could add more pressure on the BoE to pause its rate-hiking cycle.
The BoJ prefers to wait and see whether Japan’s weak economy can withstand the impact of slowing US and Chinese demand. Last week, BoJ Governor Kazuo Ueda said that the central bank could exit its negative interest rate policy when its inflation target of 2% is near and they would have adequate proof by the end of the year to assess whether interest rates should stay negative.
Japanese Industry Minister Yasutoshi Nishimura said on Tuesday that at some point the Bank of Japan will be unable to use monetary policy to buy time. Nishimura told a post-cabinet news conference that “inflation is now accelerating. Given what’s happening across the globe, policy aimed at buying time will eventually end and normalise.”
In other related news, Japanese Prime Minister (PM) Fumio Kishida said that he plans to explain Japan’s financial and economic policies in New York.
At Friday’s meeting, the BoJ is expected to keep its short-term interest rate target of -0.1% and its 10-year bond yield target of around 0%. Markets will closely watch whether Governor Kazuo Ueda will provide any hints about the timing of a policy move at his press conference after the meeting.
Apart from the BoE and BoJ central bank policy meetings, traders will also focus on Wednesday’s release of Consumer Price Index (CPI) data from the UK’s Office for National Statistics ahead of the BoE’s announcement on Thursday. The Federal Reserve (Fed) will also release the interest rate decision together with the revised Summary of Projections on Wednesday.