The war in the Middle East and the sharp rise in energy prices set the stage for this week's global central bank decisions. With oil prices surpassing $100 a barrel, stoking inflation fears, investors are focused on the US Federal Reserve (Fed), the Bank of Japan (BoJ) and the Bank of England (BoE).
Fed's messaging will set the tone for markets
Ahead of the Fed's decision on Wednesday, markets are pricing in a 66% probability that the policy rate will remain unchanged. However, expectations of at least one rate hike by year-end persist. Fed Chair Kevin Warsh's post-decision remarks will be closely watched by markets seeking clues about future meetings. At the previous meeting, Warsh emphasized 'price stability' and stated that they have the capacity to achieve this goal.
ECB issues warning as BoE decision awaited
The European Central Bank (ECB) left rates unchanged last week, while President Christine Lagarde said the full effects of the energy shock caused by the Middle East war on inflation have not yet materialized. Lagarde also reiterated that they are not tied to a specific rate path.
The Bank of England (BoE), which will announce its decision on Thursday, is also expected to hold rates steady. Markets are pricing in one more rate hike by year-end. Meanwhile, new UK Prime Minister Andy Burnham has set out a goal of strengthening the state's role to grow the economy.
Inflation pressure and currency concerns in Japan
In Japan, annual inflation rose to 1.7% in June, the highest level in six months, while the rise in core inflation reflected the impact of energy costs. The Bank of Japan (BoJ) is expected to leave its policy rate unchanged on Friday.
The dollar/yen pair hovering near the 164 level, a 40-year high, keeps the possibility of currency intervention by Japanese authorities in play. Analysts say the central banks' decision statements and their chairs' remarks will be decisive for market direction.
