The Federal Reserve is expected to raise its key lending rate by a minimum of 0.5 percent with a strong likelihood of 0.75 percent on September 21. The current interest rate guidance level is 2.5 percent and the expectations are it will rise to over 4 percent by the beginning of 2023. Inflation fell slightly in July but regained ground in August, meaning that the Federal Reserve will most likely continue tightening monetary policy in the US.
While the US is in a technical recession, the labour market is robust and the post-pandemic recovery pattern shows surges of growth struggling to overcome inflation headwinds. This pattern is a global phenomenon underscored by the sharp rises in crude oil prices. While these have subsided in recent weeks, in the current strong US Dollar climate, exchange rates for the USD-denominated fossil fuel are a considerable hurdle when buying or selling crude oil.
The world’s most hawkish central bank’s decision on Wednesday is followed by the most dovish central bank’s decision on Thursday. The Bank of Japan (BoJ) has kept a loose monetary policy course throughout the turbulence in the interest rate markets that started at the end of the first quarter. The BoJ is expected to maintain its key interest rate guidance at the level of minus 0.1 percent on September 22.
How long can the BoJ stay dovish? Japan’s economy has begun to wave the red flag of inflation, which hit a 31-year peak of 2.8 percent in August, a comparatively high level for the Asian country which usually struggles with low inflation rates. This may pressure the BoJ to start raising interest rates amid relatively steady GDP growth, last seen at the level of 3.5 percent in the second quarter. Any signals from the BoJ that the central bank is considering tightening monetary policy could move the JPY currency pairs.
Lastly for the major trading events this week, European Central Bank (ECB) President Christine Lagarde gives a speech later today. If the speech signals that the ECB plans a more hawkish course going forward, the EUR currency pairs could be affected.
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.
