How will market direction be driven by the BoJ and Fed?


  • This time next week the outlook for global markets could look somewhat different to how they do today. With monetary policy meetings from the Bank of Japan and the Federal Reserve potentially set to drive market direction for the coming weeks, but how will the BoJ and the Fed drive market direction? The power that could be generated from the two key central bank meetings tomorrow is considerable. However, consensus seems to have little real idea of what the BoJ could do, whilst the expected reaction to potential measures also seems to be varied. Furthermore, even though market pricing would suggest there is little real likelihood of a Fed rate hike tomorrow, this could still be a very important announcement from the FOMC.


  • Arguably the BoJ will be more important as the Fed because ever since the BoJ announced that there would be a comprehensive assessment of monetary policy at this meeting, the anticipation has been heightened. Options are: 1) a cut to the deposit rate; 2) Changes to the quantitative easing program 3) changes to qualitative easing of EFTs and REITs. As I said earlier there is a range of opinions as to what the BoJ may do, but my expectation is that a form of reverse operation twist is likely of the JGB purchase program that focuses more on the short duration bonds, but with no extension of the size of the program. This would help to steepen the yield curve and help the profitability of Japanese banks. This would then leave room for a focus on future cuts to the deposit rate. Having only just increased ETF purchases to 6 trillion yen it is unlikely that this would be further increased. This would leave the BoJ options open to further tinker after it knows what the Fed is going to do.
  • However this could mean a disappointment (certainly not the first time this year markets would have been disappointed following a BoJ announcement) and yen strength. Despite this though, the strength should be limited in front of the Fed later in the day.
  • I expect the Fed to not hike in September but as much for confidence and credibility, I expect the Fed to make a serious point towards hiking in December (i.e. after the Presidential election is out of the way). Would this strengthen the dollar? Possibly, but only if the Fed removes the ambiguity from the message it puts out. Back in December last year the FOMC signalled (through the dot plots) that there could be as many as four rate hikes in 2016. Would markets take it as a significant concern if the Fed did not feel it could hike even once? I think that with the rhetoric from FOMC members (Stanley Fischer, vice chair of the FOMC, said in August there could still be two hikes this year), if there are no hikes then the credibility of what the Fed says will be significantly compromised (if it is not already).
  • Conviction in the Fed’s message could mean the dollar does pull higher into the close on Wednesday and the coming days. The extent to which could depend upon the dot plots and how confident the FOMC is going forward (the current dot plots for June 2016 are below). A very shallow path of hikes could limit the run higher on the dollar. However, there could also be equities selling off regardless of what the Fed says. Tighter monetary policy is taking the punch bowl away, whilst a lack of conviction and credibility-hitting dovishness would question what the Fed is hiding.

dot plots June 2016

  • How are markets going to react to the central bank meetings? Dollar strength could be seen across the forex majors on a conviction statement. This would mean EUR/USD testing the $1.1050/$1.1100 long term pivot band. Also Cable could come back towards the range lows and test support $1.2800/$1.2865. Dollar/Yen is a difficult call as there are lots of variables, but I believe there could be initial weakness (yen strength) on BoJ disappointment before a dollar rally on the back of the FOMC.
  • Commodities will depend upon how strong the dollar move is, but we could find the gold price testing $1300 on a high conviction FOMC, and silver could drop to test $18.50. The oil price has been more dependent on the supplies story in recent days and after an initial reaction to the dollar strength, focus will quickly turn back to the OPEC/Non-OPEC Algeria meeting.
  • Aside from the BoJ and FOMC, there is little key economic data to drive markets this week. However, the flash Manufacturing PMIs will be watched for the Eurozone and also the US on Friday. Eurozone PMIs have been dropping back in recent months and traction from the ECB easing measures seems to be waning. Furthermore, with the ISM data so disappointing for the US last month, the concern is that the traction of growth in the second half of the year is slowing. The flash manufacturing PMI for the US will give an early indicator for how Q4 could begin to develop. The EIA oil inventory report has consistently added volatility to the oil price as US production levels have stopped falling. This is likely to remain a factor on a weekly basis.
  • Watch for: BoJ monetary policy, FOMC monetary policy, flash Manufacturing PMIs



EUR/USD – A hawkish hint would put serious pressure on $1.1050/$1.1100

  • The market is on a knife edge. The longer term trend support and long term pivot range all sits between $1.1050/$1.1100 and this could be pressure on a hawkish Fed. A strong guidance to December with a conviction outlook for rate hikes going forward would drive near term dollar strength. However, a wishy-washy FOMC statement and cautious press conference from Yellen wold drive the pair higher.
  • Technically very neutral, but a breach of $1.1050 support would re-open the downside once more. This means the $1.0800/$1.0900 support area comes back into play. The key overhead resistance comes in between $1.1375/$1.1400.
  • Watch for: FOMC statement and press conference

GBP/USD – A conviction FOCM decision would test $1.2800

  • UK economic data has been better (far more positive surprises) than the US data but the dollar has been strengthening as expectations for a December hike has been increased. Clearly the FOMC decision is key for this but I do not believe that the dollar strength will be ongoing.
  • The medium term range is broadly above $1.2800 and below $1.3500, and a conviction Fed would test the support. Technically a two day close below $1.2796 would be the breakdown but this is not what I expect for now. There is a downside bias near to medium term but the FOMC will drive any break.
  • Watch for: FOMC statement and press conference

USD/JPY – Volatility will mean a break of 101.20/103.35 range

  • The net result on Dollar/Yen could be difficult to pinpoint with so many variables but this could mean the big winner is volatility in the coming days. How dovish will the BoJ be? Will they disappoint and defer decisive action until after the Fed? Will the Fed act with conviction and generate pricing for a December rate hike? This all suggests that there could be several days before the market accepts the new pricing for Dollar/Yen.
  • The consolidation between 101.20/101.35 will be over after tomorrow. The longer term technical are still bearish within the downtrend channel but an upside break could usher a new phase of trading. Disappointment from both banks would drive a breach of 100, with the next key support 99.08.
  • Watch for: BoJ monetary policy, FOMC statement and press conference

Gold – The long term bullish arguments could be seriously questioned  

  • It is difficult to gauge the moves on gold as a dovish BoJ is supportive, but a Fed that hints at December will drive dollar strength. My feeling is that the dollar strength could still be the overriding factor near term and put pressure on gold.
  • Technically the big long term supports between $1300/$1310 would come under pressure on a hawkish/high conviction Fed. For now the bulls are still in control and the medium term range play is intact, but a move below $1300 would change these arguments.
  • Watch for: BoJ monetary policy, FOMC statement and press conference

Oil – Volatile, choppy with no clear trend

  • More talk of oversupply has hit the oil price in recent weeks and if the dollar is strong on top of that from the Fed then the outlook for a further correction on oil could continue. The OPEC/Non-OPEC meeting next week will add to the volatility though.
  • Support is at $43.00 on WTI and $45.30 on Brent Crude. These could come under pressure if recent corrective trends continue. This would also mean that the longer term bull trends would come under significant pressure too.
  • Watch for: FOMC statement and press conference driving dollar strength, EIA oil inventories to drive volatility, comments on a production freeze

Indices – Will equity markets continue to correct after the Fed?    

  • S&P 500 – A technical breakdown below 2148 opened a more corrective outlook which continues. A more hawkish Fed would add to this pressure. The support at 2120 is key now.
  • DAX Xetra – The top pattern still implies 10,080 and a band of neckline resistance 10,442/10,500 is being tested but the bulls will know a failure here would be a concern.
  • FTSE 100 – FTSE has reacted positively in the past couple of sessions but the move now needs to break through the reaction high at 6928 to sustain a bull run. However, if the Fed signals that December is when the next hike could be the another bout of profit taking could set in. Key support remains 6612/6654

Economc Calendar


Tuesday 20th September

  • US – Building Permits & Housing Starts

Wednesday 21st September

  • Australia – Mid-year Economic and Fiscal Outlook
  • Japan – Bank of Japan monetary policy
  • US – Crude Oil Inventories
  • US – FOMC monetary policy & press conference
  • New Zealand – RBNZ monetary policy

Thursday 22nd September

  • US – Weekly Jobless Claims
  • US – Existing Home Sales

Friday 23rd September

  • Japan – Manufacturing flash PMI
  • Eurozone – Manufacturing flash PMI
  • Canada – CPI
  • US – Manufacturing flash PMI



Monday 26th September

  • Eurozone – German Ifo Business Climate
  • US – New Home Sales

Tuesday 27th September

  • US – S&P/CS House Price Index
  • US – Flash Services PMI
  • US – CB Consumer Confidence
  • US – Richmond Manufacturing Index

Wednesday 28th September

  • US – Durable Goods Orders
  • US – Crude Oil Inventories

Thursday 29th September

  • US – GDP (Q2 Final)
  • US – Weekly Jobless Claims
  • US – Pending Home Sales

Friday 30th September

  • China – Caixin Manufacturing & Services PMIs
  • Japan – CPI
  • UK – Current Account
  • UK – GDP (Q2 final)
  • Eurozone – CPI (flash)
  • Canada – GDP
  • US – Personal Consumption Expenditure
  • US – Michigan Sentiment (revised)


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