On 24 July, one of the worst stock market sessions in months took place: the S&P 500 index fell by 2.3 per cent and the Nasdaq 100 by 3.6 per cent. Both indices are now 4.7 per cent and 9 per cent below their respective peaks. Nonetheless, the financial performance of companies is positive: 56 per cent of the largest companies reported higher sales in the second quarter and 78 per cent achieved profits above expectations. Most US companies, especially in the financial sector, are doing well. The current declines may be a reaction to the Microsoft systems blackout and the realisation of profits after a long rise in the indices. In the coming week we will learn the key decisions on interest rates. First up will be the Bank of Japan's stance, around which expectations of another interest rate hike are growing. This has caused the USD/JPY to plunge nearly 6 per cent and fall to the lows of May, forcing market participants to abandon their existing strategies, increasing volatility and making the correction feel like an avalanche. On Wednesday, we will learn the FOMC decision on US interest rates, which will be the main event of the week for investors. The following day, their attention may be captured by the Bank of England's decision.
Table of contents:
Wednesday, 31.07, 5:00 CET, Japan interest rate decision
The Bank of Japan kept the key short-term interest rate at 0-0.1 per cent at its June meeting, which was in line with expectations. The board signalled the possibility of tapering bond purchases at its July meeting, which was voted 8 to 1. The Bank is currently buying about 6 billion yen worth of bonds per month. The latest statement pointed to a moderate recovery in Japan's economy, with resilient private consumption thanks to better business profits and spending, with exports and public investment flat. Annual inflation was 2-2.5 per cent, with a slight increase in inflation expectations.
Analysts' forecast is for another interest rate hike, to 0.25 per cent.
Source: Tradingeconomics.com
A higher-than-expected interest rate could be bullish for the JPY, while a lower-than-expected interest rate could act bearishly on the JPY.
Impact: EUR/JPY, USD/JPY
Wednesday, 31.07, 20:30 CET, US interest rate decision
The Federal Reserve kept interest rates at 5.25-5.50 per cent in June, in line with forecasts. The FedWatch tool indicates a 93.3 per cent probability that rates will be held at the next meeting in July. The market is pricing the first rate cut in September with 100 per cent certainty, which could significantly impact markets.
Source: Tradingeconomics.com
A higher-than-expected interest rate could be bullish for the USD, while a lower-than-expected interest rate could act bearishly on the USD.
Impact: EUR/USD, USD/PLN
Thursday, 1.08, 13:00 CET, UK interest rate decision
The Bank of England kept its main interest rate at 5.25 per cent in June, in line with expectations. Institution officials ruled that it was a ‘finely balanced’ decision. Inflation fell to the 2 per cent target thanks to lower energy prices and moderate inflation expectations. Although a decline in GDP has been avoided, it continues to hover around zero.
However, current analysts' forecasts already assume a first cut to 5 per cent at the next meeting.
Source: Tradingeconomics.com
A higher-than-expected interest rate could be bullish for GBP, while a lower-than-expected interest rate could act bearishly on GBP.
Impact: EUR/GBP, GBP/USD, GBP/PLN
Grzegorz Dróżdż, CAI MPW, Market Analyst of Conotoxia Ltd. (Conotoxia investment service)
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