Global markets brace for significant monetary policy decisions this week from Japan, the US, and the UK, following the yen’s recent surge fueled by expectations of a rate hike from the Bank of Japan (BOJ).
Yen Strengthens on Tightening Bets
The yen advanced against all its Group of 10 peers on Monday, driven by speculation of monetary tightening in Japan. The long-struggling currency has regained some of its losses in recent sessions, now poised for its best monthly performance against the dollar this year.
Central Bank Watch: FOMC, BOJ, and BOE
Market participants are keenly watching the trifecta of central bank policy decisions. The Federal Open Market Committee (FOMC) is expected to maintain its current stance but may signal potential rate cuts soon. The BOJ is likely to announce quantitative tightening measures, while the Bank of England (BOE) is tipped to enact its first rate cut since 2020.
Treasury and Bond Market Movements
In the US, Treasury 10-year yields declined one basis point to 4.18%. Meanwhile, in China, a rapid bond rally, which has raised regulatory concerns about financial risk, has extended, pushing the benchmark yield to a record low.
Fed’s Prospective Rate Cuts
The Fed is expected to signal plans to cut rates in September at the conclusion of its meeting on Wednesday. Analysts anticipate this will initiate a series of reductions each quarter through 2025. Money markets are fully pricing a September move, with swaps data indicating the possibility of two more cuts by year-end. While the July FOMC meeting is likely too soon for a cut, it sets the stage for a rate reduction in September.
BOJ’s Quantitative Tightening
Just hours before the Fed’s decision, the BOJ is expected to release details of its plans to reduce monthly bond purchases at the conclusion of its two-day policy meeting on Wednesday. There is also a significant risk of a rate hike. The yen climbed 2.4% against the dollar last week as traders priced in a more than two-thirds chance of a 10 basis point hike, triggering a selloff in risk-sensitive developed and emerging market currencies.
BOE’s Anticipated Rate Cut
As for the BOE, most economists expect it to reduce rates for the first time since the start of the pandemic on August 1, although a close vote is anticipated.
Oil Prices Steady Ahead of OPEC+ Meeting
Oil prices steadied near a six-week low ahead of a key OPEC+ meeting this week. Analysts are divided over whether the group will proceed with plans to boost supplies next quarter. The coalition aims to restore supplies withheld from the market for two years to prop up prices. However, sputtering economic growth in key consumer China and new oil supplies from across the Americas threaten to derail these plans.
Market Implications
The outcomes of these central bank meetings will be pivotal for global markets, particularly in light of the yen’s recent rally and ongoing concerns about economic growth in major economies. Investors will closely watch for any shifts in policy stances and their potential impacts on currency, bond, and commodity markets.