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Key points to watch out for:
This week’s meeting on Tuesday, July 30, and Wednesday, July 31, is likely to give the bank even greater prominence, as policymakers have indicated that a decision on tapering bond purchases will be made. According to Reuters, the current monthly purchases of six trillion yen could be halved over the next few years, as reported by various sources.
However, the likelihood of a rate hike is less clear, as policymakers have not decided on the precise timing, though most agree that further hikes will be needed by 2024. Investors have increased their bets on a July hike, with the probability of a 10 basis point hike now standing at around two-thirds. Consequently, there is still significant potential for disappointment if the bank keeps rates on hold.
The sluggish economy and concerns about weak consumer demand could justify the need for caution, especially since inflation, although above target, is far from being under control. Additionally, the yen’s considerable rebound in July may give policymakers some breathing space regarding the urgency of raising rates.
Even if there are no major surprises on Wednesday and the only announcement is the long-awaited decision on tapering bond purchases, it is unlikely that policymakers will make risky or dovish decisions, as this could derail the yen’s recovery. The Bank’s most recent estimates may provide additional signals about the future course of monetary policy in such a scenario. Given the magnitude of the yen’s rally, a hawkish stance could generate some profit-taking in yen crosses.
The US economy shows only slight signs of slowing, similar to the labor market. This environment has made it difficult for Fed policymakers to assert that inflation is on a sustained path toward 2%. However, their recent comments indicate growing confidence that the target is within reach and that the monetary policy stance may change to reflect this, indicating a cautious bias.
After adding 206,000 jobs, the US labor market is expected to have added another 185,000 jobs in June. The unemployment rate is expected to remain unchanged at 4.1%, and average hourly earnings growth is expected to sustain a similar month-on-month pace as in May.
Poorer-than-expected employment numbers could boost confidence on Wall Street but hurt the dollar by reinforcing aggressive rate-cutting bets, while strong data could exacerbate the current sell-off in the equity market.
Investors will have the opportunity to review several other data releases this week, including the consumer confidence index and JOLTS job openings on Tuesday, July 30; the ADP employment report, Chicago PMI, and pending home sales on Wednesday, July 31; and the ISM manufacturing PMI on Thursday, August 1.
Recent comments indicate no unanimity in the Monetary Policy Committee on whether to cut rates in August, and market sentiment is also split 50-50. Policymakers have hinted that rates don’t need to remain as high as 5.25% to continue tightening, so the odds are tilted toward a reduction of around 25 basis points.
Ultimately, the bank’s current quarterly estimates may change the minds of the Monetary Policy Committee. If they decide to begin easing policy, it is likely to be a close call and will be reported as a hard-line cut amid continued upside risks to inflation. Therefore, although a cut is not entirely ruled out, the pound should not necessarily lose much value on the news.
For the European Central Bank, the most recent PMI surveys, which were poor again in July, are likely to take precedence, especially for those who support a further rate cut in September. Therefore, the CPI estimates on Wednesday, July 31, will be key for investors.
June’s report provided some respite as headline inflation fell back to 2.5% year-on-year, and there could be more cheer for July. The harmonized index of consumer prices is expected to fall to 2.3% year-on-year in July, bringing it closer to the ECB’s 2% target. The impact of this fall will be smaller if there is no similar decline in core measures of inflation. For the euro to experience significant pressure against the dollar, there will need to be a rise in core inflation.
The latest bout of risk aversion in the markets has been devastating for the Australian dollar, so better-than-expected CPI figures could provide a much-needed boost. Also on the radar for Australian traders will be the Chinese manufacturing PMIs due for release on Wednesday, July 31, and Thursday, August 1, amid continued pessimism about the Chinese economy.
- The Bank of Japan, the Federal Reserve, and the Bank of England are set to take a trio of measures
- One could hike, the other stand still, and the other cut rates
- The ECB will also be in the spotlight as it releases preliminary GDP and CPI data for the eurozone
- The week concludes with the US employment report
The Bank of Japan Is Expected to Reduce Its Stimulus, Will It Also Raise Rates?
The Bank of Japan has been frequently in the news recently. Whether it’s the speculation surrounding rate hikes, continued hints of bond tapering, or rumors of intervention into the currency markets, Governor Ueda has made his direction clear since taking office.This week’s meeting on Tuesday, July 30, and Wednesday, July 31, is likely to give the bank even greater prominence, as policymakers have indicated that a decision on tapering bond purchases will be made. According to Reuters, the current monthly purchases of six trillion yen could be halved over the next few years, as reported by various sources.
However, the likelihood of a rate hike is less clear, as policymakers have not decided on the precise timing, though most agree that further hikes will be needed by 2024. Investors have increased their bets on a July hike, with the probability of a 10 basis point hike now standing at around two-thirds. Consequently, there is still significant potential for disappointment if the bank keeps rates on hold.
The sluggish economy and concerns about weak consumer demand could justify the need for caution, especially since inflation, although above target, is far from being under control. Additionally, the yen’s considerable rebound in July may give policymakers some breathing space regarding the urgency of raising rates.
Even if there are no major surprises on Wednesday and the only announcement is the long-awaited decision on tapering bond purchases, it is unlikely that policymakers will make risky or dovish decisions, as this could derail the yen’s recovery. The Bank’s most recent estimates may provide additional signals about the future course of monetary policy in such a scenario. Given the magnitude of the yen’s rally, a hawkish stance could generate some profit-taking in yen crosses.
Fed Will Not Cut Rates in July
The Federal Reserve will report its decision a few hours after the Bank of Japan on Wednesday, July 31. Of the three central banks, the Fed is the least likely to announce any changes in monetary policy. If there was a remote chance of an unexpected cut, it was further reduced after the stronger-than-expected second-quarter GDP reading.The US economy shows only slight signs of slowing, similar to the labor market. This environment has made it difficult for Fed policymakers to assert that inflation is on a sustained path toward 2%. However, their recent comments indicate growing confidence that the target is within reach and that the monetary policy stance may change to reflect this, indicating a cautious bias.
July NFP Will Keep Powell on His Toes
Jerome Powell may not comment on a specific timetable for the start of the Fed’s easing cycle, limiting downside risks to the US dollar from the meeting. With the release of the July non-farm payrolls scheduled for Friday, August 2, the Fed Chairman may not want to risk pre-committing to a rate cut if the data does not surprise the upside.After adding 206,000 jobs, the US labor market is expected to have added another 185,000 jobs in June. The unemployment rate is expected to remain unchanged at 4.1%, and average hourly earnings growth is expected to sustain a similar month-on-month pace as in May.
Poorer-than-expected employment numbers could boost confidence on Wall Street but hurt the dollar by reinforcing aggressive rate-cutting bets, while strong data could exacerbate the current sell-off in the equity market.
Investors will have the opportunity to review several other data releases this week, including the consumer confidence index and JOLTS job openings on Tuesday, July 30; the ADP employment report, Chicago PMI, and pending home sales on Wednesday, July 31; and the ISM manufacturing PMI on Thursday, August 1.
Will the BoE Be Encouraged to Cut?
The Bank of England will conclude central bank decisions this week, and although the uncertainty of the UK election is behind us, it is not entirely clear what the outcome will be on Thursday, August 1, as a tight vote is looming. After some setbacks, inflation in the UK has fallen considerably, reaching the bank’s 2% target over the past two months. However, BoE policy makers remain concerned about high services inflation and the slow decline in wage growth.Recent comments indicate no unanimity in the Monetary Policy Committee on whether to cut rates in August, and market sentiment is also split 50-50. Policymakers have hinted that rates don’t need to remain as high as 5.25% to continue tightening, so the odds are tilted toward a reduction of around 25 basis points.
Ultimately, the bank’s current quarterly estimates may change the minds of the Monetary Policy Committee. If they decide to begin easing policy, it is likely to be a close call and will be reported as a hard-line cut amid continued upside risks to inflation. Therefore, although a cut is not entirely ruled out, the pound should not necessarily lose much value on the news.
Eurozone CPI on the Expectation of a Weaker Economic Rebound
In the Eurozone, the economic recovery seems to have stalled. Figures to be released on Tuesday, July 30, are expected to show that in the three months to June, the NFP rose by about 0.3% quarter-on-quarter, pushing the annual growth rate up to 0.6%.For the European Central Bank, the most recent PMI surveys, which were poor again in July, are likely to take precedence, especially for those who support a further rate cut in September. Therefore, the CPI estimates on Wednesday, July 31, will be key for investors.
June’s report provided some respite as headline inflation fell back to 2.5% year-on-year, and there could be more cheer for July. The harmonized index of consumer prices is expected to fall to 2.3% year-on-year in July, bringing it closer to the ECB’s 2% target. The impact of this fall will be smaller if there is no similar decline in core measures of inflation. For the euro to experience significant pressure against the dollar, there will need to be a rise in core inflation.
Australian CPI Could Pave the Way for an RBA Rate Hike
This week will be particularly busy for Australian data, with releases ranging from retail sales to trade. The highlight will be Wednesday’s quarterly CPI. Inflation in Australia has continued its upward trend throughout the year, reaching 4.0% year-on-year in May. The Reserve Bank of Australia has held firm on raising interest rates again, and the more complete and reliable quarterly data may convince policymakers to continue tightening monetary policy. With the next meeting on August 6, the timing could not be better.The latest bout of risk aversion in the markets has been devastating for the Australian dollar, so better-than-expected CPI figures could provide a much-needed boost. Also on the radar for Australian traders will be the Chinese manufacturing PMIs due for release on Wednesday, July 31, and Thursday, August 1, amid continued pessimism about the Chinese economy.
