BoJ hikes rates as we await the FOMC

• European markets on the rise despite disappointing eurozone CPI release
• BoJ hikes rates, driving JPY strength
• FOMC meeting in view

The positive start to trade in European markets has painted stocks within the region in a positive light given the volatility and uncertainty on the other side of the Atlantic. In a week that was always going to be loaded full of risk across financial markets, European markets have appeared largely unscathed despite a sharp pullback for US tech giants yesterday. Instead, European traders have been able to focus on the positives, with the FTSE 100 rising into a two-month low ahead of a potential rate cut from the Bank of England tomorrow. However, the latest eurozone inflation gauge gave bulls less to celebrate, with both core and headline inflation coming in above expectations. The rise in headline CPI takes eurozone inflation back to 2.6%, marking the third such reading in the past six-months. The final stretch back down to 2% remains a difficult hurdle to overcome, and today’s report will likely create jitters for those expecting a September rate cut that is currently being priced at a 68% chance.

The Asian session saw plenty of action, with the Bank of Japan opting to hike rates and outline a plan to taper bond purchases. Coming at a time when we are increasingly confident of rate cuts from many of the world’s top central banks, today’s monetary tightening from the BoJ highlights the belated nature of their efforts to curb inflation pressures. With the BoJ expected to hike again this year, the Yen has continued its recent recovery, pushing back after a protracted period of weakness that saw USDJPY reach a 34-year high this month.

Looking ahead, the FOMC meeting provides an opportunity for the Fed to inform markets over the pathway for rates, with a September hike currently being deemed as a foregone conclusion by many. With inflation still stuck above target, the recent declines have helped push expectations of a dramatic pivot from the Fed in September. However, today’s FOMC meeting provides the opportunity for Powell to better align market and Fed expectations. Whether the tentative signs of weakness within the jobs market will be enough to bring a strong reaction from Fed remains to be seen. However, coming at a time when we are seeing significant jitters around tech earnings, there is a hope that Powell will provide grounds for optimism within markets going forward.