Forex News

Fed and BOJ on Interest Rates: Opposite Reactions of the Market


To lead the market in this week were the decisions on interest rates of two of the world’s great economies.

If in the case of the United States it was expected an increase of interest rates that did not happened, on the other hand Japan has unexpectedly left interest rates unchanged.

Let’s see what happened in detail during the last week of July.

The Federal Reserve met market expectations, leaving interest rates unchanged at + 0.50%, stationary since last December.

A 2016 full of referrals continues after insistent rumors that wanted multiple increases awaiting presidential elections.

On the eve of the first estimate of US GDP of the second quarter, it was the time of the FOMC minutes.

The tone for the future of the United States was optimistic but also mysterious. The Federal Reserve reported that short-term risks have diminished and that a rise in interest rates could come true in recent times.

The board of the US central bank gave no details for the future and so the guidance remains vague. All the monetary policy decision will depend, probably, both by domestic macroeconomic data and from the monitoring of global economy trend.

The market seems to have taken optimistic FOMC statements, but not enough to increase the chances of a rate hikes in September and December which are descended. The euro-dollar exchange rate was affected and it recorded + 0.31%.

At the end of the week it was the time of (preliminary) US GDP of the second quarter.

As reported on the economic calendar, the GDP of United States in the second quarter registered an increase of + 0.4%, amounting to 1.2%. However, the results were lower, compared to expectations of analysts placed at + 2.6%.

The United States entered on a vicious cycle. The weakness is represented by business investment. The most alarming part of the last published data relates to productivity growth.

On the markets, the major indexes have retraced except Nadsaq which was buoyed by positive results of Google and Amazon. The euro strengthened against the dollar, which in turn became weak against the yen. The euro is worth 1.1136 US dollars against 1.1127 before the release of GDP data.

The yen has spent the eve of the Bank of Japan decision on interest rate to strengthen against euro and dollar, bringing the exchange rates of USD / JPY and EUR / JPY on the fifth day of decline in the last six days.

It was initially raised upward, the amount allocated for tax reform that aims to bring out Japan from economic stagnation that last for years: it has gone from 20 to 28 trillion yen, about 6% of the entire Japanese economy.

Surprisingly, Kuroda left its accommodating monetary policy unchanged, confirming the interest rates at 0.1%. Whilst opening a further downward revision of the cost of money, the institute did not touch the amount of assets to buy every year (80 trillion).

There will be a change in the volume of ETFs purchasing which will be almost doubled, increasing from 3.3 trillion to 6 trillion. It is an expansion of the monetary policy of the value of 52 billion Euros per year.

The Bank of Japan lost another good opportunity to lighten ‘the weight of its own currency’. After the news, the yen appreciated, and it returned to fill the role of safe haven, as well as gold.

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