BoJ announces the official policy stance

31 January, 2017

The Dollar has kicked off the week with a slump, with uncertainty in the upcoming FOMC meeting on Wednesday dominating the market. Investors expect that the FED rhetoric will point to a quicker pace of rate increase, allowing the Dollar to rally up to the December peaks, while cautious comments and nebulous hints can finally cut the American currency, sending it below the level of 100. Selloff was the subject of the Asian trading on Monday, which sent the Dollar index down by 0.33% to 100.23 with the downside limit seen at 100 – equilibrium level before the FED meeting.

The Friday’s report on US GDP showed a substantial trade deficit in the fourth quarter, where exports fell by 4.3%, as imports increased by 8.3%, reflecting the concerns of retailers in levying taxes on imported goods and trade wars started by President Trump. GDP exceeded expectations adding 2.1% to the growth of the US economy on an annual basis, while consumer confidence from U. Michigan rose to a peak of several years, promising some bright prospects for the pace of US consumption. This is the main driver of the country’s economic growth. Overall, the data came out very positive but the dollar’s reaction was mixed, as the market has already been preparing for the Fed decision.

As the uncertainty over the FED position is even higher than in the previous meeting, the important of the report which can help determine the market sentiment today is Personal Consumption Expenditure (PCE) – the main indicator of inflation for the FED. The data for 2016 showed a steady increase in the inflation to the level of 1.6-1.7% which is close to the target level of 2% set by the FED. The positive deviation of this index will increase the chances of a “hawkish” rhetoric by Janet Yellen, who has repeatedly stressed that the committee’s decision is very dependent on the incoming economic data.

On Tuesday, the Bank of Japan will have to decide whether they will insist on the path of the grand stimulus or point to the phasing out of the program. USD/JPY has lost half a percent at the beginning of the trading session on Monday, showing that the cash injections to the economy can be reduced by the BoJ. On Thursday, the Bank of England will assess the impact of Brexit on the economy and decide whether the country outside of the EU needs record low interest rates. On Friday, investors will wait for the report on unemployment in the US (NFP), which is likely to confirm that the labour market is sufficiently heating up so the FED began to halt stimulus.


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