Divergence Between Fed and BoJ

14 March, 2017

The March FOMC meeting will be held for two consecutive days from today. The interest rate decision will be announced at 18:00 GMT on Wednesday 15th March. 7 out 10 FOMC members, including the Fed doves Yellen and Brainard, made some hawkish comments lately. The US labour market data in February released last Friday outperformed expectations. Per the CME’s FedWatch tool: the current probability of a rate hike in March has jumped to a peak of 95.2%.

We can expect that the Fed will announce two to three rate hikes this year. If the Fed does not adhere to raising rates they are highly likely to face a credibility issue.

Following the Fed, the Bank of Japan will announce interest rate decision and monetary policies at 02:00 GMT on Thursday 16th March.

Despite weak domestic demand, Japanese Q4 GDP growth in 2016 was revised up to 1.2%, showing four straight quarters of growth, indicating the Japanese economy expanding at a faster pace.

Improved export conditions, corporate profits and capex (which benefits from the weakening of the yen post the US presidential election) is the major factor that has contributed to economic growth.

Japanese consumer prices returned to positive territory in January. The core inflation rate rose for the first time in a year. The markets are expecting that Japan’s inflation will pick up a level above 1% by the end of the year; however, this is still below the Bank of Japan’s 2% target.

The Bank of Japan will likely keep rates steady in negative territory and continue its quantitative easing programme until it sees a sustainable pickup in inflation. The divergence between the Fed and the BoJ’s monetary policies will likely result in USD strengthening against JPY.

The UK parliament has passed the Brexit bill. The House of Commons overturned the amendments proposed by the House of Lords that guarantees the rights of EU citizens in the UK and gives parliament a “meaningful vote” on the final Brexit deal, by 335 votes to 287. The House of Lords accepted the decision by 274 to 118. The UK government now has no hurdles on the way out of the EU, ready to trigger the Article 50 of the Lisbon Treaty. GBP/USD plunged to an 8-week low of 1.2108 this morning during the European session.


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