Central Banks

Weekly Market Outlook: Fed leads the Central Banks Marathon This Week

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Traders will be closely watching several meetings of central banks including the Federal Reserve, Bank of England, Bank of Japan and Swiss National Bank policy meetings. In the US, it is widely expected to announce the timing of the asset purchase tapering, while no significant changes are expected from other major banks. Meanwhile, Canadians will be voting for the new parliament on Monday. 

Elsewhere, central banks in Sweden and Turkey will probably hold interest rates at current levels, while the latter may turn to cutting rates as the bank shifts focus to core inflation. Norway is seen raising rates after slashing them from 1.50% to 0% when the pandemic hit. Brazil also is set to hike interest rates by another 100 bp for the second consecutive meeting.

USD: Fed is heading to Tapering

The Federal Reserve is expected to keep the federal funds rate unchanged at 0.25% at the end of its two-day meeting on Wednesday. Meanwhile, investors are watching closely if the central bank will begin withdrawing stimulus this year as the economy notably rebounds. Fed Chair Jerome Powell has been assuring markets that the Fed would take a steady approach to tapering bond purchases, despite several members have been calling for early tapering due to rising inflation. Some members have expressed their concerns that the Fed is already behind the curve on inflation. 

According to the FedWatch tool, market participants are fully pricing the federal funds to be kept on hold.

Central Banks - FedWatch

The Fed is seen signalling a reduction in monthly bond purchases in the next few months as the bank cannot afford to delay tapering steps with inflation at a 13-year high for 3 consecutive months. Another awaited announcement is the updated dot plot. Investors are eager to watch what the Fed is expecting for the rest of the year and the expected path for future rates. In June’s dot plot, Fed members anticipated the first post-pandemic rate hike in 2030. 

Fed Chair Jerome Powell is facing a communication challenge convincing market participants that tapering stance doesn’t start the clock on raising interest rates

GBP: BoE Probably Turns Hawkish 

Central Banks - Bank of England
Bank of England

After a higher-than-expected inflation surge in August and upbeat labor market figures, market participants are anticipating sooner-than-expected policy tightening by the Bank of England. Despite interest rates going nowhere soon, BoE is expected to adopt a hawkish tone about the policy path. The bank will probably confirm that its bond purchases will end in December. It is highly anticipated that the committee will discuss the Quantitative Easing exit strategy in the upcoming meeting. 

Bank of England is seen to keep rates unchanged at 0.10%, and continue asset purchases with current £895 bn size, or even lower, until the end of December 2021. 

Recently, Governor Andrew Bailey disclosed that the last meeting witnessed a 50-50 split on whether conditions of sustainably achieving the inflation target have been met. The bank had previously stated that it will keep rates on hold until these conditions are met. 

The MPC committee will be expanded to nine members this meeting, after the appointment of Huw Pill as chief economist earlier this month. It is interesting to see if the new “hawkish” member will soon favor policy tightening. 

Key data for the GBP to follow include consumer confidence, flash Markit PMI data and retail sales.

BoJ and SNB to Remain on Hold 

The Bank of Japan, on the other hand, is not going to change its policy stance anytime soon. The bank is anticipated to hold the short-term interest rate target at -0.1% and the 10-year bond yield target around 0% to stimulate the economy and boost inflation that has been well below the central bank’s 2% target over the past years. The pandemic situation is still critical with many regions still in a state of emergency. 

Central Banks - Japanese Yen
Japanese Yen

The same applies to the Swiss National Bank which is not seen to give up its ultra-loose monetary policy in the foreseeable future. The bank is widely expected to keep interest rates in the negative territory at -0.75% while reiterating that the franc remains highly overvalued. 

Both Swiss Franc and Japanese Yen are likely to show a minimum reaction to monetary policy meetings. As safe-haven currencies, they will remain vulnerable towards risk appetite. 

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