The following article is based on research by Marshall Gittler, Head of Investment Research for FXPRIMUS.
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Following the Brexit vote, the major central banks have so far been following the philosophy of Lao Tzu, the founder of Taoism, who said, “by doing nothing, everything is done.” That’s what the Bank of England did two weeks ago, the ECB last week and it looks likely to be the result of the FOMC meeting Fed this week too. The VIX index – the so-called “fear gauge” – has collapsed since the Brexit vote, falling to the lowest level since Aug. 2014. The turmoil that was expected to follow the vote hasn’t arrived – yet, at least – and so policy makers probably feel little urgency to take immediate action. The more markets rally and the fear of Brexit recedes, the less of a rush the central banks need to be in – with the possible exception of the Bank of Japan.
The Bank of Japan is the central bank with the biggest question mark. As prices continue to fall, people are losing confidence in the Bank’s ability to meet its 2% inflation target at all. As a result, some analysts expect the BoJ to increase its stimulus at this Friday’s meeting. I don’t, however. I think that with risk aversion diminishing and the yen weakening again, the BoJ is likely to keep its policy unchanged. That could cause the yen to strengthen somewhat.
As for the FOMC, I don’t think anyone expects a move at this meeting. There won’t be a press conference afterwards, so we will have to examine the statement to see any change in their view. The two key points will be a) whether the recovery in payrolls in June improved their view of the job market, and b) whether they still feel the need to “closely monitor…global economic and financial developments,” now that Brexit is out of the way.
The week’s other major theme will be the advance Q2 GDP figures, first from the UK on Wednesday, then the EU and US on Friday. GDP data is always out of date by the time it’s published, and being pre-Brexit, these will be even more dated than usual. The UK data may be considered particularly unrepresentative as it’s expected to show that growth was accelerating – probably not the case now, as Friday’s PMIs show. The EU GDP is forecast to collapse, which makes it more likely that the ECB may ease in September and thereby is negative for the euro. The US figure on the other hand is expected to return to over 2% growth, which could make it easier for the Fed to tighten again and thereby be positive for the dollar.
The last week of the month sees the release of a lot of Japanese data. The most important figure is the CPI, which is expected to show continued deflation. However, any impact from the data is likely to get lost in the focus on the BoJ meeting.
In the Eurozone, investors will be waiting for Thursday’s German CPI to see if German inflation does accelerate a bit as expected, followed by Friday’s EU-wide CPI, also expected to accelerate a bit. That could be positive for the euro.
