Focus on the Fed and BoJ for the coming days


  • Central Banks will be in focus for the coming days as the Federal Reserve, Bank of Japan and next week the Bank of England give what could be crucial monetary policy decisions. This is sure to shape market moves in the coming days and possibly weeks. What sort of action can we expect?


  • The Fed will again decide not to hike interest rates as the fallout from Brexit remains undetermined so far. It is not a meeting of updated projections, dot plots or followed by a press conference, so tweaks to the FOMC statement will be the only impact for markets on Wednesday. I believe that this could be a meeting where the FOMC minutes (released 17th August) will have the bigger impact.
  • The Bank of Japan could be a different story though, with this BoJ meeting having long been marked as the one where a significant action will be taken (on Friday morning). The market had looked to price in some sort of significant action previously, however disappointment is increasingly being expected. “Helicopter money” is being ruled out, whilst finance minister Aso suggesting the BoJ would decide on stimulus has suggested a lack of co-ordination between the government and the BoJ in terms of stimulus and again this has reduced expectations. An increase in QQE (through increased ETF and REITs purchases) and a possible 10 basis points cut to the deposit rate could easily be seen.
  • The expectation of monetary easing being triggered by the Bank of England next week have increased significantly following the very disappointing flash PMIs for July. This has been cited by Martin Weale who is historically one of the two more hawkish members of the MPC as a reason for action next week. Whether Weale himself would use his final vote on the MPC to cut rates (having for so long argued for tighter monetary policy) remains to be seen, however if Weale is thinking this, then the doves on the committee will probably need less persuasion.
  • In forex markets the trend of dollar strength may have come under a bit of a corrective move today (due to the yen strength largely) however the sheer number of major central banks that could be on the cusp of easing monetary policy are helping to drive dollar strength. Expect huge volatility on yen pairs this week with little real firm consensus on what the BoJ could do. The big mover is still likely to be Sterling/Yen though, with such volatility surrounding both currencies.

yen volatility

  • Commodities have been under pressure as the dollar strength has played out. This has driven a correction of 17% on oil. Concerns over dollar strength, global demand contraction in the wake of Brexit and questions over supplies arising now that the Baker Hughes rig count has been rising for the past four weeks and Russian supplies increased above those of Saudi Arabia. Precious metals have performed much better in their correction (gold down 4%) as the fundamentals of negative bond yields and the prospect of looser monetary policy will ultimately mean this correction will be bought into.
  • Equity markets have been showing signs of stalling in their rallies in recent days and this could begin to drive some profit-taking after such a strong move. This would be considered to be healthy as the prospect of looser monetary policy should be supportive.
  • Economic growth will also be key this week, with the first look at Q2 GDP data for UK, Eurozone and US. Perhaps the impact of this announcement will be reduced as the vast majority will be comprised of data that was pre-Brexit. However, clearly better growth data will still help to support risk appetite, with the oil price decline potentially in focus.
  • Watch for: FOMC monetary policy, BoJ monetary policy, Q2 GDP for US



EUR/USD – Fed is likely to drive near term direction

  • The market looks fairly settled again around $1.1000 in front of the Fed, with the recent drift lower suggesting that the market is moving for a mildly more hawkish FOMC. The chances of a December rate hike are back over 50% in the past couple of days (to 52% currently) and this would suggest there needs to be something in the FOMC statement that needs to justify this shift.
  • Technically the move clear of the pivot resistance around $1.1050 comes with the continued negative configuration on momentum. Between $1.1000/$1.1050 looks to be where the market is now tempted to sell again for a test of $1.0909 (post Brexit low) but also then $1.0800 looks on.
  • Watch for: FOMC monetary policy, Eurozone CPI & GDP, Q2 GDP for US

GBP/USD – Expect continued pressure on $1.3060 and $1.3000

  • The disappointment of the PMIs has re-engaged the bears and if Martin Weale (historic hawk) is looking to shift dovish then imagine what the doves might do. Sterling is under pressure again and the trend of weakness is back in play.
  • The resistance at $1.3290/$1.3310 is stronger now and pressure seems to be building for a decisive test of the $1.3060 support (which was hit and basically held this morning). Technical momentum remains weak and rallies a chance to sell. Below $1.3060 implies around 250 pips of initial downside which would imply a move to test the $1.2796 low.
  • Watch for: UK Q2 GDP, FOMC monetary policy, Q2 GDP for US

USD/JPY – Bears are back in control ahead of the BoJ  

  • After almost 750 pips of rally the expectations seem to have got ahead of themselves with the likelihood that the BoJ could now underwhelm the market. Although today’s move would take some of the volatility out of a reaction on Friday, there is a feeling that there needs to be a green light from the government in order to engage “helicopter money”. With Finance minister Aso saying that monetary policy was up to the BoJ this has reduced expectations of a big bazooka move on Friday.
  • The downtrend channel remains intact (although the intraday move to 107.47 threatened it). With momentum indicators giving a range of sell signals the outlook is for downside once more and that rallies are a chance to sell.
  • Watch for: FOMC monetary policy, BoJ monetary policy, Q2 GDP for US

Gold – Near term corrective move could be about to come to an end

  • The stronger dollar has helped to drag gold back from $1374 but this is still likely to be a near term corrective move within the longer term bullish outlook. The major central banks are likely to be falling over one another in the coming months to ease monetary policy (especially if the BoJ and BoE pull the trigger). This along with continued swell of negative bond yields is a positive environment for being long gold. Gold volatility will increase with the Fed and BoJ.
  • The $1306 medium to longer term key breakout is the start of an ideal buy zone (between $1260/$1306) and the drift back has been slowing in recent days. A move above $1335 would break through resistance that would trigger the bulls again.
  • Watch for: FOMC monetary policy, BoJ monetary policy

Oil – Correction continues

  • A continuation of dollar strength would be negative but the underperformance of oil during dollar weakness suggests that the market is increasingly concerned by both demand (post Brexit) and supply increases. The EIA inventories continue to drive volatility.
  • Rallies are increasingly a chance to sell. The breach of $43.03 the May low has opened further losses and below minor support at $42.40 the next reaction low where the buyers supported the market in the rally is at $37.60.
  • Watch for: EIA oil inventories to drive volatility

Indices – Equities consolidating in front of Fed and BoJ    

  • S&P 500 – the rally on the putting back of expectations of a Fed rate hike has started to run out of steam and if the Fed leans hawkish in any way in the statement this could induce a near term bout of profit-taking. Below 2155 opens a correction back towards the old all time high breakout at 2134.
  • DAX Xetra – The DAX rally is now into a range of overhead supply between 10,120/10,370. The DAX reacts to global growth indicators and any disappointments in GDP data could drive a profit-taking move.
  • FTSE 100 – Sterling weakness continues to drive an outperformance of the FTSE 100, however if markets come off in the wake of any less accommodative stance from the Fed or disappointment of the BoJ then it could induce a correction (which would be healthy). There is still good support between 6427/6612.

Economc Calendar


Tuesday 26th July

  • US – S&P Case Shiller House Price Index
  • US – Flash Services PMI
  • US – CB Consumer Confidence
  • US – New Home Sales
  • US – Richmond Manufacturing Index

Wednesday 27th July

  • Australia – CPI
  • UK – GDP (Q2 prelim)
  • US – Durable Goods
  • US – Pending Home Sales
  • US – Crude Oil Inventories
  • US – FOMC monetary policy (statement only)

Thursday 28th July

  • US – Weekly Jobless Claims

Friday 29th July

  • Japan – CPI
  • Japan – BoJ monetary policy
  • Eurozone – Flash CPI
  • Eurozone – GDP (Q2 Preliminary Flash)
  • US – GDP (Q2 Advance)
  • US – Employment Cost Index
  • US – Michigan Sentiment (revised)



Monday 1st August

  • China – Manufacturing PMIs
  • Eurozone – Manufacturing PMI
  • UK – Manufacturing PMI
  • US – ISM Manufacturing

Tuesday 2nd August

  • Australia – RBA monetary policy
  • UK – Construction PMI
  • US – Personal Consumption Expenditure
  • New Zealand – Unemployment

Wednesday 3rd August

  • China – Caixin Services PMI
  • Eurozone – Services/Composite PMIs
  • UK – Services PMI
  • US – ADP Employment Change
  • US – ISM Non-manufacturing
  • US – Crude Oil Inventories

Thursday 4th August

  • UK – Bank of England monetary policy, minutes & Quarterly Inflation Report
  • US – Weekly Jobless Claims
  • US – Factory Orders

Friday 5th August

  • Australia – RBA monetary policy statement
  • US – Non-farm Payrolls
  • US – Unemployment & Average Hourly Earnings
  • US – Trade Balance


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