In forex trading, the big events this week are the meetings of the Federal Reserve and Bank of Japan. The two central bank giants are closely watched as their monetary policy decisions are key drivers of major forex pairs and indices.

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Fed

 

The Federal Reserve kicks off its April meeting on Tuesday and will deliver its announcement to the markets on Wednesday.

Markets expect the bank will hold fire on rates this month, but even if the bank keeps its powder dry, traders are eyeing any potential shift in language from officials as they respond to the shifting economic landscape.

Fed funds futures trading indicates a practically 0% chance the bank will pull the trigger in April and there is increasingly little to suggest this will change as the year goes by.

From its path to four rate hikes in 2016 outlined in December, the Fed has apparently given into the markets and is playing a cautious hand.  

Turmoil in financial markets at the start of the year has been linked to the Fed’s decision to raise rates last year; subsequent soothing noises apparently have helped to calm equity markets and lift global stocks to year-to-date highs.

The key question for traders this week is how hawkish the Fed wants to sound if it still has ambitions of raising again this year.

At its March meeting there was some dissent as two officials back a rate rise, expressing concern about waiting too long to normalise conditions. In the end the vote was 9-1 in favour of sticking but if there are louder calls for the Fed to move sooner, markets may start to adjust their forecasts.

BoJ

 

After the Fed comes the Bank of Japan, which is under a lot more pressure to deliver something to markets after a startling rise in the yen in recent weeks.

The BoJ is still reeling after it cut rates into negative territory earlier this year. The effect, which was to send the yen soaring versus the dollar and stocks to plummet, was exactly the opposite of what the bank had intended.

Failure to deliver more stimulus could hit the yen further – but markets are also not that content with negative rates as a policy tool.

The BoJ is already hoovering up just about everything it can get its hands on. In addition to owning almost every JGB, the central bank is now the proud owner of around 55% of the nation’s ETFs and is a top 10 shareholder in something like 90% of Nikkei-listed companies.

While the yen has strengthened from around 120 to 111 versus the dollar, it’s eased away from a peak hit last week after a run of losses following reports that the BoJ is ready to unleash more easing.

Investors are wary, however, about what impact more stimulus could have after the introduction of negative rates led to a stronger currency.