Learn to trade Central Bank decisions
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The end of May was marked by political turbulence in Italy, which caused severe pressure on the Euro. The possibility of new Italian elections and the risks of an Italian exit from the eurozone seriously disturbed investors in both debt and foreign exchange markets. It is likely that this topic will reemerge and once again become the main cause of pressure on the euro.
However, investors in the currency and debt markets are currently switching to more traditional drivers, specifically fundamental indicators and monetary policy. The week of June 11th will be saturated with meetings of the world's most influential central bankers.
Wednesday June 13th will see the Fed's rate decision, comments and forecasts as well as Powell's press conference. Thursday June 14th will bring a similar set from the ECB whilst on Friday June 15th the Bank of Japan announce its decision and hold a press conference. Markets will be focused around the actions, comments and rhetoric from these G3 Central Bankers.
The Fed is forecast to raise interest rates on Wednesday. Markets are almost unanimous in this likelihood, with the probability of this action approaching 91%. But the markets will be cautious as they recall that a month ago markets were 100% confident in an increase.
The events in Italy caused increased safe-haven demand, including US, which led to a decrease in yields which was then eventually reflected in Fed rates futures. The main question many market participants are asking is whether there will be a revision of the number of expected raise rates from the Fed?
The U.S. economy has confirmed the persistence of impressive growth rates and inflation is gradually gaining momentum. In such conditions there is a chance that the Fed will hint for a willingness to raise rates in both September and December.
Any hint of a September increase is likely to boost the dollar, as the markets have not fully laid the expectation of this scenario. The chances of a September hike are only 65%. If these scenarios do not come to fruition then, in our opinion, the most probable scenario could put pressure on the dollar forcing it to downplay its April-May rally.
At the ECB press conference, the main focus from journalists will certainly be on what Italian-born Draghi thinks about euro problems in the light of the political uncertainty in Italy, and how the ECB could react to the problem.
By now passions have subsided and therefore we are not expecting any comments to be made on the political issues in Italy. In our view, investors will be more interested in comments and forecasts on inflation. Eurozone inflation rose sharply in May and this could have an impact on the attitude to tapering QE. Potentially the topic of folding a QE program has the strongest chance of influencing a single currency. In our opinion, the highest probability is that the ECB will ignore the risks from Italy but will also suggest that the surge in prices in May was a temporary event.
The Bank of Japan is unlikely to surprise the markets with any major comments, so it is unlikely to cause increased volatility on Friday morning. It is most likely that the BOJ will be happy to confirm the acceleration of growth in wages and retail sales but will not be frightening the markets by the rapid exit from its QQE due to a new slowdown in the rate of inflation.
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