Global markets' attention this week is focused on the interest rate decisions to be announced by three major central banks. As tensions rise in the Middle East and oil prices climb above $100, increasing inflation risks, the messages from the US Federal Reserve (Fed), the Bank of Japan (BoJ) and the Bank of England (BoE) are of critical importance.
Investors seek clues in Fed's statements
Ahead of the Fed's decision on Wednesday, money markets are pricing in a 66% probability that the policy rate will be kept unchanged. However, expectations for at least one rate hike by year-end remain strong. The Fed Chair's post-decision remarks will be of great importance for investors seeking clues about the September, October and December meetings.
Europe awaits BoE decision
While the European Central Bank (ECB) left rates unchanged last week, President Christine Lagarde said the impact of the energy shock from the Middle East war on inflation has not yet fully materialized. Lagarde reiterated that they are not tied to a specific rate path. The BoE, which will announce its decision on Thursday, is widely expected to hold rates steady. Markets are pricing in one more rate hike by year-end.
BoJ to remain cautious in Asia
In Japan, annual inflation rose to 1.7% in June, a six-month high, with the rise in core inflation reflecting the impact of energy costs. The BoJ is expected to keep its policy rate unchanged on Friday. The dollar/yen pair hovering near 164, a 40-year high, keeps the possibility of currency intervention by Japanese authorities on the agenda.
Analysts say the central banks' decision statements and the tone of their chairs will be decisive for market direction.
