Forex trading: It was a case of steady as she goes from the Federal Reserve and Bank of Japan this week, as both central banks decided to leave monetary policy unchanged.

But while the decisions were the same, there were very different outcomes and reactions in forex markets.

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Federal Reserve

 

The Fed struck a decidedly dovish tone as it backed away from raising rates but left the door open to increase the federal funds target rate in June.

Policymakers still anticipate raising rates twice this year, although markets are increasingly pricing in no more hikes in 2016 as the Fed seems increasingly nervy about upsetting still fragile financial markets.

Yet the Fed’s concerns about the global economy seem to be easing a little. There was once again no statement on the ‘balance of risks’ facing the US economy, which clouds the outlook a little.

The Fed faces a conundrum – jobs are being created at a record pace but there is still lacklustre growth.

In its statement, the Federal Open Market Committee noted that labour market conditions continue to improve even though economic activity is slowing.

“Growth in household spending has moderated, although households' real income has risen at a solid rate and consumer sentiment remains high,” policymakers noted in another example of the fine balancing act facing them.

The FOMC said “economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate”, adding that the “actual path of the federal funds rate will depend on the economic outlook as informed by incoming data”.

US economic growth is turning sluggish. Figures released after the meeting showed GDP grew by just 0.5% in the first quarter, while the recent Philly Fed business sentiment index turned negative in April.

Caution is the message and it’s little wonder the soothing noises has cooled demand for the dollar as markets push out expectations for the first rate rise this year.

Esther George, the Kansas City Fed boss, again was the sole dissenter and voted for a quarter-point increase in rates.

Bank of Japan

 

While the Fed’s decision was no surprise, the Bank of Japan (BoJ) rattled markets by choosing to do nothing.

The central bank has been under increasing pressure to counter a stronger yen but the lack of action only served to send the currency higher, with USDJPY erasing all its gains from the preceding week.

A stronger yen has dented efforts by the BoJ to spur inflation and increase investment and it was a shock to many that the bank held off from any further easing.

BoJ governor Haruhiko Kuroda seems intent on waiting for negative rates to play out, saying these will take a few months to feed through - leaving the door open for further action in the summer if required. 

RBNZ

 

The other central bank in action this week was the Reserve Bank of New Zealand, which also opted to hold rates. The slightly hawkish tone from the bank contrasted sharply with the Fed, help the kiwi to rise to its strongest level in almost a year against its US counterpart.

But there was plenty of caution from the RBNZ too.

“The outlook for global growth has deteriorated over recent months due to weaker growth in China and other emerging markets. Prices for some commodities, including oil, have picked up but remain weak,” said governor Graeme Wheeler.

Officials also expressed concern about the strength of the New Zealand dollar and added that “further policy easing may be required”.