How the Market Will Respond to the Fed, ECB and BOJ Actions

This week is going to be a big one for the global markets, as three major central banks are set to announce their policy decisions. The Fed, the ECB and the BOJ will all reveal their views on the economy, inflation and interest rates, and their actions could have a significant impact on the market sentiment and volatility. In this article, we will look at what the market expects from each central bank, how they may surprise or disappoint the investors, and what strategies you can use to trade the central bank outcomes.

How Central Banks Will Influence the Markets This Week

Central banks are back in focus this week as three major ones are scheduled to meet and decide on interest rates. Inflation remains a major concern for all these central banks as they continue to aim for their long-term target of 2%. We will discuss what the market expects from these central bank outcomes and how they may affect the global economy.

US Fed Meeting on June 14th

The US Fed is expected to pause on June 14th, to take a breather after more than a year of aggressive rate hikes. The Fed has raised rates in every meeting since March 2022, making it the most hawkish cycle in history.

The Fed chair Jerome Powell signaled this pause after the May 2023 meeting, saying that the Fed was “comfortable” with its current policy stance and that it would “act as appropriate” to sustain the expansion.

However, the market will be closely watching Powell’s commentary after the meeting outcome for any hints of future rate moves. Any comment that suggests further rate hikes could be expected after a pause would be negative for the markets, as it would imply more tightening of monetary conditions.

The market will also be paying attention to the latest inflation data, which are due on June 13th. The US CPI and Core CPI are expected to rise by 4.5% and 3.2% year-on-year respectively, according to Bloomberg consensus estimates. These numbers are well above the Fed’s 2% target and could put more pressure on the Fed to act sooner rather than later.

ECB Meeting on June 15th

The ECB is expected to hike its main refinancing rate by 25 basis points on June 15th, to 4.00% from 3.75%. This would be the fourth rate hike since December 2022, as the ECB tries to rein in inflation in the Eurozone.

Consumer expectations for Eurozone inflation eased significantly in April, according to the European Commission’s survey. Inflation expectations for the next 12 months fell to 4.1% from 5% earlier in March.

The ECB is expected to pause on rate hikes this summer, though another 50-basis point rate hike probability remains till September 2023, according to Bloomberg’s ECB rate path tool.

The ECB’s commentary post policy will be important to watch out for as well, as the ECB may announce a temporary pause after the rate hike on June 15th. The ECB may also signal that it is ready to adjust its policy tools if needed, depending on the economic outlook and inflation developments.

Bank of Japan Meeting on June 16th

The Bank of Japan may keep its policy rate at -0.10%, maintaining its ultra-low interest rate policy. The BOJ may also make no tweaks to its yield curve control policy, which aims to keep the 10-year Japanese government bond yield around zero percent.

The BOJ may maintain its forecast of a moderate economic recovery, as robust corporate and household spending cushion the blow from slowing overseas demand. The BOJ may also signal that inflation is overshooting its forecast, as core consumer prices rose by 1.5% year-on-year in April, above the BOJ’s projection of 1.3%.

The BOJ governor Ueda will hold a briefing after the policy meeting, where he may face questions about the BOJ’s exit strategy from its massive stimulus program. The market will be looking for any clues about how and when the BOJ may start tapering its asset purchases or raising its policy rate.

Equichain Wealth Advisors: Market View & Opinion

This week’s focus will shift back to central banks, and the market will be keenly following their commentary and guidance. There is no major surprise expected from the ECB as the market has already factored in another hike and a temporary pause.

The US Fed chair Powell’s post-meeting press conference will be crucial as the market has also priced in a pause from the US Fed. However, any hawkish remarks or indications of further rate hikes could spook the markets and trigger a sell-off.

The BOJ’s policy outcome is unlikely to cause much volatility, unless there is any change in its JGB yield curve control or any hint of policy normalization. The BOJ has been maintaining its negative interest rate policy since 2016 and another change would trigger huge outflows from global risk assets. However, the probability of such a surprise is minimal and the market is not expecting any negative shocks from the BOJ.

We advise our clients to be cautious and vigilant this week, as any unexpected policy moves or statements from the central banks could have significant implications for the global markets. We also recommend diversifying your portfolio and hedging your risks with appropriate instruments.