The current week (July 29 - August 4) will be packed with important events for the markets, including meetings and decisions of the three central banks - the Bank of Japan, the Bank of England and the US Federal Reserve and the eurozone GDP and data from the US labor market. These events can increase volatility in the market.
The main event of the week seems to be the decision of the Federal Open Market Committee (FOMC), which according to the market will decide to cut federal funds rate by 25 basis points from 2.25-2.5 percent to 2.00-2.25 percent. The Fed cut its rates for the last time at the end of 2008. Since then, the main interest rate has been kept close to zero, so that at the end of 2015 a cycle of monetary policy tightening could begin. At the end of 2018, the Fed decided to raise the federal funds rate for the last time and since then we have been observing interest rate stabilization. The July meeting may therefore again be a historic event.
Although the condition of the American economy looks good, the growth is at a satisfactory level, the unemployment rate is the lowest for about 50 years, and the stock market is at record levels, the Fed may decide to cut. The main reason is the commercial war, but it is also important to remember the political pressures that are huge. Politicians and the Fed will do everything to ensure that the longest cycle of economic growth in US history (from the time of measurement) could take even longer. FOMC decision on Wednesday at 20:00, press conference at 20:30.
An important publication will be a Friday reading of data from the US labor market, including a popular change in employment in the non-farm payrolls sector. The American labor market remains strong but seems to have similar problems as those observed in Great Britain or in Poland. There is a shortage of people to work there, which may cause a rise in wage pressure, which in turn may translate into higher hourly earnings reading. Data on Friday at 14:30.
The Bank of England may hold back decisions until October, expecting whether and under what conditions the new British Prime Minister, Boris Johnson, will actually lead Britain to leave the European Union by that date. The probability of hard brexit seems to increase, which can affect the pound. The GBP/USD exchange rate has already fallen to the lowest level since the first half of 2017. The market interest rate probability of a cut by the Bank of England in December this year is currently at 50 percent. The Bank of England's decision on Thursday at 13.00.
Looking at the fx options market we can spot, that the increased volatility might be expected at GBP/USD followed by NZD/USD due to interest rate cut expectations next week by RBNZ. The expected volatility has risen for USD/JPY but remains stable for EUR/USD currency pair.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal Opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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