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FOMC and BoJ to dominate markets this week

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The Bank of Japan meets early Tuesday (17th March) for its monthly monetary policy review. BoJ Governor Kuroda, in the past meeting left monetary policy unchanged and refrained from further expansion to the stimulus program, while remaining optimistic about a pickup in inflation. The Japanese Yen was trading mixed albeit strengthening against most of its peers with the exception of the US Dollar.

Heading into tomorrow’s meeting, the market consensus is largely expecting BoJ to stand pat on policy without drifting too much from its February’s rhetoric. The Central Bank expects a moderate rebound in crude oil prices and therefore could likely refrain from a stimulus expansion at least in this meeting. The BoJ has been calling for the private sector to increase wages as the Central Bank is of the opinion that consumer spending needs to increase. Later this week, the spring wage negotiations take place and ahead of the outcome of this meeting, the BoJ is unlikely to jump the gun.

Should the Japanese central bank remain neutral, the Yen is likely to strengthen further across the board ahead of the FOMC event on Wednesday, 18th March.

FOMC – No more patience?

Of particular interest to the markets will be the wording of the FOMC’s March policy statement. With an upbeat jobs report from February and with the US unemployment rate inching to 5.5%, the Fed will be releasing its monetary policy statement followed up by a press conference as well as economic projections.

While volatility will pick up during the event, the markets will be focused on how the Fed will tune its language. To date, the markets have been under the expectation that the term “patience” refers to a June rate hike and thus will be looking to clues in the language.

The FOMC statement is likely to reflect on the jobs growth and also on the inflation expectations and the GDP projections.

The US Dollar has continued to remain bullish whilst taking a breather ahead of the FOMC event. In the run up to the Fed’s meeting this week, the equity markets have already started to worry, with the S&P 500 and the Dow Jones down -0.61% and -0.81% on Friday’s close.

It would take a fine balancing act when it comes to this FOMC meeting as the Fed would have to treat carefully in an effort not to upset the markets too much while also ensuring that a repeat of the ‘taper tantrum’ doesn’t hurt the emerging markets, which has also started to trend lower in anticipation of a US interest rate hike.

In regards to a possible lift off in interest rates, the Federal Reserve is likely to hike rates either in June or in September marking an end to a historical period of low interest rates and easy monetary policy. The Euro, which has been trending lower on a widening divergent monetary policy could likely weaken further with the possibility of dropping to parity and below, while the Yen could also weaken against the Greenback.

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