Central banks in focus

All the action will come from central banks today, with the Bank of Japan, European Central Bank, Bank of England, Riksbank and in Malaysia Bank Negara set to deliver policy decisions today. None are likely to alter policy settings but accompanying press statements will be under scrutiny. The policy decisions take place against the background of relatively calmer market conditions ahead of the August US jobs report at the end of the week and vote by the US Congress on limited military actions against Syria.

Among the several central banks deliberating on policy today the ECB will be among the most closely watched. Although no policy change is expected EUR direction will be determined the tone of the press conference. Modest upward revisions to staff growth forecasts will bode well for the EUR. Additionally in the wake of recent better data it is possible that the ECB shifts the balance of risks upwards to “broadly balanced” which could also help to stem the EUR’s recent decline. However, the ECB is unlikely to want to give markets the impression that it is turning more hawkish, with “forward guidance” set to be repeated.

While the BoE is highly unlikely to deliver any surprises today GBP is finding ongoing support from relatively positive data surprises including a series of purchasing managers’ indices released this week. Although the BoE will attempt to limit the rise in gilt yields via the use of forward guidance markets will find it difficult to ignore the better data. Given that positioning in GBP is generally short the currency is likely to remain supported both against the EUR and USD.

The BoJ is not likely to act on policy at its meeting today given that recent economic data both on the growth and inflation front are moving in line with expectations. However, there are still plenty of risks that higher inflation will not be sustained, implying potential fore more aggressive policy action in the months ahead. This, combined with relatively higher US bond yields relative to JGBs, will maintain upside pressure on USD/JPY over the coming weeks and months. In the near term USD/JPY may struggle around the 100 level but this is likely to prove to be a temporary barrier.

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