As I’ve discussed in my previous article on the factors that might bring risk aversion back to the forex market, we’ve got three monetary policy announcements coming our way this week so I decided to come up with a more detailed breakdown of what to expect and how currencies might react.
FOMC Statement (January 27, 7:00 pm GMT)
Fed Chairperson Janet Yellen and her merry band of policymakers are first to step up to the podium on Wednesday’s U.S. trading session, but they aren’t expected to whistle a tune that’s as upbeat as their previous statement. Recall that the FOMC pushed through with their liftoff last December and became the first among its major central bank peers to hike interest rates in a long while.
Fast forward a month later, downside risks to inflation are back with a vengeance and the global economy is facing weaker growth prospects. With that, Fed officials are likely to take it easy with their hawkish bias this time, possibly reiterating that they will proceed at a very gradual pace when it comes to tightening monetary policy. After all, the minutes of their December huddle did indicate that inflation trends would be at the front and center of their decision-making from now on.
Keep in mind, however, that this particular rate statement won’t be followed by a press conference with Chairperson Yellen afterwards so forex analysts aren’t expecting much fanfare. In line with this, FOMC members might refrain from making any major changes in their official statement to prevent further market chaos. Come to think of it, stronger dollar appreciation on risk-off flows could put additional downside pressure on inflation so the Fed might want to avoid that!
RBNZ Rate Statement (January 27, 8:00 pm GMT)
Just a few moments after the Fed decision, it will be the Reserve Bank of New Zealand’s turn to take the stage. For now, no monetary policy changes are expected, as RBNZ Governor Graeme Wheeler might announce that rates will be maintained at 2.50%.
The economic situation hasn’t been looking too rosy for New Zealand these days, as the latest set of quarterly inflation data indicated a sharp 0.5% drop in price levels. It doesn’t help that the country’s dairy sector has been struggling to get back on its feet, with the recent GDT auctions showing consecutive declines in prices and the ongoing slowdown in China likely to dampen demand.
Still, just as in Canada, the local currency’s depreciation is actually providing some support for local price levels since this makes imported goods more expensive. Besides, the RBNZ just cut interest rates by 0.25% in their earlier policy decision but hinted at a much more positive outlook for this year.
BOJ Monetary Policy Decision (January 29, Asian session)
Last but certainly not least is the Bank of Japan, which is expected to announce its policy decision sometime during Friday’s Asian trading session. Now BOJ policymakers have been pretty stubborn about making adjustments to their stimulus program in the past, insisting that the Japanese economy could stay resilient and that inflation will eventually meet their targets soon.
In an interview during the World Economic Forum in Davos, BOJ Governor Kuroda stayed mum about further easing and even expressed confidence that Japan can weather the recent slump in oil prices. Still, the BOJ head honcho noted that there are several different ways to ramp up their easing efforts if underlying inflation trends aren’t looking too good.
Yen forex traders might have to wait until the very last minute to see how price levels have been faring, as Japan is set to print its CPI readings just before the BOJ policy decision. Weak results could strengthen the odds of hearing dovish remarks, especially since the strong yen and falling commodity prices could continue to keep a lid on inflation. However, the decision might be a close call, as the improving labor situation and wage hike talks might convince policymakers to just sit on their hands.
Potential Forex Reaction
With the financial markets and the global economy off to a rough start for this year, central bank officials might be keen to prevent additional volatility and try to restore calm instead. Policymakers could acknowledge the current economic risks but stop short of making any actual changes, possibly even reassuring investors that the situation could still improve later on.
In any case, volatility could still pick up right before, during, and after the actual events so make sure you’ve got the necessary adjustments on your open positions ready. If you’re not willing to expose your account to these additional risks, there’s no shame in sitting on the sidelines and watching price action unfold. I’ll keep y’all posted on how it all turns out so stay tuned!