Fed and BoJ rate decisions enter the limelight

Will the Fed echo investors’ recession fears?

The dollar extended its slide against all but one of its major peers on Monday, gaining some ground only against the Japanese yen. Today, the greenback is holding steady, extending its advance against the yen.

Fears that US President Donald Trump’s policies could damage the US economy have weighed on the dollar as well as on Wall Street, prompting investors to pencil in around 75bps worth of rate reductions this year at some point last week. That’s one quarter-point reduction more than the two projected by the Fed’s latest dot plot.

That said, inflation expectations have soared lately, with the preliminary 1-year expectation of the University of Michigan shooting up to 4.9% in March from 4.3% in February. This allowed market participants to somewhat scale back their rate cut bets. They are currently penciling in 60bps worth of reductions by December.

All this suggests that it is a very confusing period for the Fed and that officials are likely to find themselves between a rock and a hard place tomorrow when they are scheduled to announce their interest rate decision and their new economic projections. The decision may be the easy part. Investors are widely anticipating the Committee to stand pat at this gathering. However, they may still be sitting on the edge of their seats in anticipation of the forward guidance and the new dot plot.

If Powell and Co. appear genuinely concerned about the impact of tariffs on the US economy and the dots are revised lower to indicate a greater number of basis points worth of rate reductions this year, the US dollar is likely to extend its slide.

Is a summer BoJ hike a realistic case?

Ahead of the Fed, during the Asian session tomorrow, the BoJ starts this week’s central bank chorus, with its own interest rate decision. This Bank is also expected to remain on hold and thus, the attention will be on clues and hints about when policymakers are planning to press the hike button again.

Sticky inflation in Japan, the acceleration in economic activity, the hawkish remarks by policymakers, and the agreement between companies and unions on a historic pay hike has allowed market participants to assign a 50% probability that the next quarter-point rate increase will materialize in June. The next hike is nearly fully priced in for September.

Therefore, any hawkish commentary by the BoJ tonight may allow the yen to reverse its recent losses and resume its prevailing long-term uptrend. The opposite may be true if policymakers sound concerned about Trump’s trade policies and thereby do not appear confident about when they are planning to raise rates again.

German politics add more fuel to euro’s engines

The euro resumed its rally as Germany’s lower house of parliament is expected to approve a massive surge in borrowing that could boost the Eurozone’s largest economy. The parties that are in talks to form a governing coalition after last month’s election agreed to create a 500-billion-euro infrastructure fund, which if carried out, would overturn decades of fiscal conservatism in Germany. That said, even if the plan passes through the lower house, it still has to go to the upper house for approval.

Wall Street gains on bargain hunting, gold enters uncharted territory

On Wall Street, all three of the main stock indices rebounded ahead of talks between US President Trump and Russian President Putin aimed at ending the war in Ukraine. However, gold, which has been the ultimate safe haven the last few years, extended its rally towards new record highs, climbing above the psychological round number of $3,000. This means that the prospect of peace is not a pure catalyst for the markets yet. Perhaps it was an excuse for bargain hunting after Wall Street’s strong selloff.