A slightly hawkish change from the FED before an important decision

Friday on Wall Street was dominated by sellers, which resulted in declines in the main stock indices. Volatility was also elevated due to the "three witches' day" - when options and futures contracts expired. US bond yields rose across the yield curve. EUR / USD exchange rate ended the week just below the 1,09 level. This week is rich in decisions of major central banks.

The FED's "hawkish" change

This week, the Fed meeting on March 19-20 will be in the spotlight. The Fed is widely expected to leave interest rates unchanged at 5,25-5,50%. Markets expect the Fed's first rate cut to be delayed until July as recent inflation reports showed continued price pressure. Last Friday, Fed Funds Futures were pricing in just a 15 bps rate cut by June, 26 bps by July and a total of 72 bps by the end of the year. Week earlier, the market assumed a reduction in the cost of money by 23 basis points by June and 95 bp by the end of the year. A somewhat hawkish change can be seen here. We'll also get an updated dot chart as well as the latest forecasts for GDP, inflation, employment and interest rates.

Will the Bank of Japan surprise now?

In addition to the Fed, the Bank of Japan will also decide on interest rates. That decision is tomorrow. The market expects the BOJ to end negative interest rates and yield curve control this week or in April (or at least make it more flexible). Of course, there is no 100 percent. certainty that this will happen. It may also be the case that a move towards the normalization of monetary policy will simply be announced in a sufficiently binding manner tomorrow, but will not be implemented until the next BoJ meeting, which will take place on April 26. From the point of view of the currency market, the moment of the actual move is an unimportant detail. The only thing that matters now is whether the BoJ will start a tightening cycle or whether the increase will be just a one-off adjustment of monetary policy to current economic conditions.

Currently, in Japan, the strength of the inflation shock caused by the global economic effects of the pandemic is weakening. In turn, the wage and price spiral is starting, although slowly for now. On Friday, Japan's largest trade union confederation announced the results of the current wage round. With an average increase of 5,3%. (including a 3,7% increase in basic wages), the BoJ has an argument justifying the decision to start normalizing monetary policy.

A long road to Australia's inflation target

Tuesday will also bring a decision Reserve Bank of Australia. However, a lower level of excitement is expected here. Rates should be maintained, although the RBA is seen as a restrictive bank. After the last meeting, the bank did not rule out another increase - at least this is according to the official statement. In recent weeks, data from Australia have not given any indication that the chance for a dovish turn has increased. Although inflation has made significant progress recently, there is still a long way to go to meet the RBA's inflation target. And given that inflation has also taken longer to decline than in Western countries, there is reason to worry that disinflation in Australia will stop with some delay. This would also be in line with the RBA's latest forecast, which sees CPI falling relatively slowly towards target.

Source: Łukasz Zembik, OANDA TMS Brokers