At the beginning of this week, contradictory signals from major economies overturned the market. Investors will have a clearer understanding of the recent global currency policy trends this week. The Bank of Japan will announce its interest rate decision on Wednesday, Beijing time, while the Federal Reserve and the Bank of England will announce their interest rate decisions on Thursday. Traders are currently struggling to figure out if the Bank of Japan will raise interest rates, and when and how the Federal Reserve and the Bank of England will cut interest rates.

Due to the uncertainty of policy and economic growth prospects, many markets were nervous at the close of last week. Wong Kok Hoong, head of institutional stock sales and trading at Maybank Securities Pte. in Singapore, said, 'This week will be more interesting. And it might be more tiring.'

The following is a preview of this week's major central bank policies:

Japan Central Bank

The Bank of Japan has rarely raised interest rates in recent years, but there is uncertainty about what action it will take. In addition, Bank of Japan Governor Haruhiko Kuroda made comments publicly for the first time before the policy meeting. The latest economic data shows that inflation is accelerating in Japan, but consumer spending remains weak. The assumption of further policy tightening last week pushed the yen sharply higher. Since July 11, the yen has appreciated by about 5% against the U.S. dollar, partly because Japanese officials intervened to weaken the yen.

Last week, options traders' bets on the Bank of Japan raising interest rates rose from below 40% to nearly 90%, then fluctuated between the two, highlighting the uncertainty in the market. According to the latest survey, economists are equally uncertain, with only 30% predicting a rate hike, but more than 90% seeing it as a risk.

The correlation between the yen and a large amount of leveraged investment through carry trades (borrowing yen and using it to buy high-yield assets) shows that a sharp fluctuation in the yen can quickly spread to global markets. The recent surge in the yen has rendered various popular currency strategies ineffective, from the Australian dollar to the Mexican peso.

If Kuroda does not take action, yen bulls will be hit hard, especially if policy makers' expectations of a large reduction in bond purchases are also disappointing. But if the Federal Reserve later sends any easing signals, accelerating people's expectations of a rate cut in the coming months, investors who are short on the yen will face a threat.

Charu Chanana, director of foreign exchange strategy at Sebon Capital Markets, said, 'I am still bullish on the yen, despite the huge bi-directional risks before an important week. It seems a bit excessive for an essentially dovish central bank to expect the Bank of Japan to raise interest rates and adjust its bond purchase plan at one meeting.'

The Bank of Japan will raise interest rates next time?

Investors will carefully study the policy statement from the Federal Reserve and the speech by Federal Reserve Chairman Jerome Powell to look for any information that supports expectations of a rate cut in September. If the Fed releases a signal of a rate cut in September, it will be in line with the views of economists and swap traders, who have fully digested the expectation of at least two rate cuts of 25 basis points this year. The Federal Reserve's benchmark rate is currently in the range of 5.25% to 5.5%, which was a peak reached a year ago.

In recent weeks, policymakers have been pointing out a balanced job market and falling inflation, indicating that they believe the reasons for lowering borrowing costs in the world's largest economy are becoming increasingly sufficient. James Knightley, chief international economist at ING Group, said, 'The upcoming FOMC meeting will lay the groundwork for the rate cut in September, and the Federal Reserve will move from a restrictive stance to a more neutral one.'

Some market observers, from New York Fed President William Dudley to Mohamed El-Erian, chief economic adviser at Allianz, have even proposed more aggressive easing policies than currently expected. Dudley said that the Fed should consider cutting interest rates this week, while El-Erian warned that if the Fed maintains interest rates at an excessively high level for too long, there may be a 'policy mistake.'

By the end of July, U.S. Treasuries are expected to have risen for three consecutive months, the first time since the middle of the year in 2021. Confidence in rate cuts has been increasing recently, driving the Bloomberg U.S. government debt index to a two-year high this month. As the market bets on the imminent implementation of loose currency policies, the yield on 2-year U.S. treasuries has fallen, narrowing the spread between them and 10-year U.S. treasuries.

However, the US stock market has been slightly shaken this week, partly due to concerns about consumer demand raised by the earnings reports of several companies. An indicator that measures implied price volatility of the S&P 500 index this week has jumped nearly 1 point higher than expected volatility in two weeks, showing that current uncertainty is higher than future uncertainty. The market's violent fluctuations reflect the importance of traders this week. This week will also see the release of non-farm payroll reports in the United States, and technology giants such as Amazon (AMZN.US), Meta Platforms (META.US), Microsoft (MSFT.US), and Apple (AAPL.US), which have led the market this year, will also release financial reports this week.

Bank of England

There is a division in the market over whether the Bank of England will cut interest rates for the first time since the pandemic on Thursday, lowering the benchmark rate from the current 0.25%. Although the UK inflation rate has dropped from double digits a year ago to the central bank's target of 2%, the unemployment rate is still rising, and price increases in the service sector remain high. The economy has rebounded from a small-scale recession. The minimum wage rose by 10% in April, and a new Labor government plan to raise the minimum wage while providing up to 5 million public sector workers with wages higher than inflation rates poses a risk of inflationary pressures.

Since the general election in July, three hawks on the Bank of England's Monetary Policy Committee have presented reasons for opposing loose policies. Only one of the two factions has presented opposing views. Whatever the outcome, this decision may have an impact on bonds and the pound. On Friday, forward trading showed that the likelihood of a 25 basis point rate cut this week was about 50%, while the market generally expected the Bank of England to cut rates twice this year.

Economists believe that the Bank of England will change its stance. Bank of America, Deutsche Bank, and Nomura Holdings expect the ratio of decision-makers supporting the rate cut this month to be five to four. ING Group expects six officials to support this action.

According to Orla Garvey, senior investment portfolio manager at Federated Hermes Limited: "This is an important week for key data, and the Bank of England's August 1st meeting is very timely and will release the latest forecast."

Interest rate cuts will boost UK government bonds. The prospect of monetary easing and political stability has boosted UK government bonds since the Labor Party won the election by an overwhelming margin. The two-year UK government bond yield is at its lowest level in over a year.

For the pound, interest rate cuts are not so favorable, as they will reduce the attractiveness of the pound as part of carry trades. The pound is the best-performing currency in the Group of Ten (G10) this year, and large banks and investors including JPMorgan and Amundi expect the pound to rise further against the US dollar to 1.35, a nearly 5% increase from current levels. Market call bets have also reached historic highs.

Bloomberg macro strategist Cameron Crise said, "As expected, recent market turbulence has caused some narrative backflow associated with equities, fixed income, and other market positions. It may be dangerous to say so, but in some ways, this time is indeed different from what we have seen before."