The financial markets are preparing for a monumental week. Everyone’s watching central banks and geopolitical developments that could have enormous effects on currency valuations. A lengthy US Government shutdown would surely be on the immediate horizon. At the same time, increasing geopolitical and economic tensions between the US and China could further undermine the US dollar’s (USD) standing. Expect traders to keep a sharp eye on pivotal interest rate decisions from a handful of major central banks. These are our own Federal Reserve (Fed), the Bank of Canada (BoC), the European Central Bank (ECB) and the Bank of Japan (BoJ).
The BoJ’s next interest rate decision on 21st September is expected to be the next focal point for Japanese yen (JPY) traders. Analysts widely expect the bank to maintain its current dovish course. Any more hawkish forward guidance will likely cause material yen strength. Looking ahead, our best event for JPY traders in the week ahead traces back to BoJ’s interest rate decision. As one analyst put it, “When in doubt, the bank will remain on hold.” Bank’s hawkish forward guidance If the bank tightens its (implicitly) hawkish tone in guidance going forward, we can expect the Yen to be supported somewhat.
Either way, the Federal Reserve is about to announce its next interest rate decision. Most experts expect a cut of at least 25 basis points. This would be negative for the USD, especially with US fundamentals still hanging in the balance. “US Fundamentals are expected to continue tantalising the greenback, with a prolonged US Government shutdown and an escalation of tensions in the US-Sino relationships possibly weighing on the USD,” noted an analyst.
The BoC’s interest rate announcement comes out this week, and will be closely watched by CAD traders. The cancellation of trade negotiations between US President Trump and Canada adds an additional layer of concern for the Loonie. “In the coming week, we expect the release of BoC’s interest rate decision to shake Loonie traders, while on a fundamental level the ending of the US-Canadian trade negotiations by US President Trump is a negative signal for the Loonie,” stated an analyst.
The ECB’s upcoming interest rate decision in Europe should provide key signals. This would be euro supportive under the right conditions. According to analysts, any dovish indicators from the ECB would undoubtedly have a negative impact on market sentiment in favor of the single currency.
Meanwhile, Australia is about to announce its Consumer Price Index (CPI) rates for the month of September. A rise in these rates will likely lead to appreciation of the Australian dollar (AUD). “In the coming week we expect the course of the US-Sino trade relationships to remain the dominant issue for Aussie traders and a possible improvement could provide some support for AUD,” remarked an analyst.
Sweden will report its initial GDP growth rate for Q3. This data will provide an important economic barometer that could affect currency movements.
Ms. Takaichi not long ago would have been considered a fringe player in Japanese politics. Depending on her priorities, her election may have important implications for Japan’s future monetary policy and broader economic strategy.
The week ahead should be an exciting one as traders around the world digest these central bank decisions against a backdrop of escalating geopolitical tensions.