While everyone is expecting the Fed to take action, the Bank of Japan is showing more caution, creating a shift in the global central bank landscape, reports Adam Button.
The Japanese yen edged higher on Tuesday after Bank of Japan Governor Haruhiko Kuroda refrained from taking any firm steps toward easing or altering forward guidance. The yen was the top performer on Tuesday while the British pound lagged again. The Federal Reserve’s Open Markets Committee (FOMC) decision is the big event on Wednesday, but Canadian GDP and US ADP employment are up first.
The BOJ didn't alter its guidance about policy at least through spring 2020 in what was a mild disappointment for yen bears. Kuroda also avoided any strong hints at action. Instead he emphasized a shift in communication to say the bank now pledges to act if price momentum is lost, rather than simply considering steps. It's a minor change and especially insignificant compared to the big turns at the Fed, ECB and elsewhere. It led to a modest dip in USD/JPY but was largely ignored as the market dials in on the FOMC. Ashraf expects a retest of 108.90s before a gradual drop towards 107.80s.
The bigger move was once again in the pound as it hit a new two-year low in Asia before flattening near 1.2150. Meetings between Ireland and the UK solved nothing with Boris Johnson insisting the UK will leave on Oct. 31 and Ireland’s Leo Varadkar insisting the withdrawal agreement won't be reopened.
Another trend was the divergence in AUD/CAD as oil prices and the proximity to the relatively-strong U.S. economy aid the loonie. In contrast, the Australian dollar fell for the eighth consecutive day and is now within 50 pips of the June low of 0.6832 – a level that's doubly important because it was also the 2016 low.
The FOMC decision follows next, setting the tone for the remainder of the week, making Friday's U.S. jobs figures appear as a distant event. The Fed received further indications that the economy is solid as consumer confidence rose to 135.7 compared to 125.0. That's the third-best reading this century. The Personal Consumption Expenditures (PCE) report was largely in line with expectations but inflation was a touch on the light side and that should embolden those calling for an insurance cut on Wednesday and an effort to get back to 2%.
There are some risks before the FOMC with the ADP report expected to show 150K new jobs, up from 102K a month ago. Canada's May GDP is also on the agenda with a 0.1% rise expected.
Adam Button is co-owner and managing director of ForexLive.com and a contributor at AshrafLaidi.com. You can see Ashraf’s daily analysis at www.AshrafLaidi.com and sign up for the Premium Insights. Ashraf's Tweet on indices here.
