The week ahead is all about central banks. The Federal Reserve (Fed), the Bank of England (BoE), and the Bank of Japan (BoJ) all announce interest rate decisions. We will finally find out the answer to the 25 or 50 basis points conundrum. The Fed has kept borrowing costs at a two-decade high for eight meetings in a row, but after the Jackson Hole speech, it is expected to deliver its first rate cut in over four years on Wednesday at 7 pm (UK time).
This comes as inflation in the US edges closer to its 2% target and the country's labour market starts to show signs of weakness.
The big question is whether a modest 0.25 percentage point cut will be enough to stave off further damage to the labour market. The market has 25bps priced in, but a few think they might go for 50bps. The logic behind this is that the Fed was criticized for moving too slowly to hike rates when the economy faced its worst bout of inflation in 40 years. If it doesn't respond swiftly, it could risk a further increase in the unemployment rate and a potential recession, rather than achieving a soft landing.
When it comes to the BoE and BoJ, both are expected to stay put this week. The BoE lowered rates in August, with Governor Bailey being the deciding vote, but it was quick to stipulate that the cut was not the start of a series. In contrast, the BoJ has been the only major central bank hiking rates, having done so twice this year, which explains the move in $/JPY back to 140, where we open today.
Overnight, despite a second attempted assassination of D.J. Trump, the markets have been calm. West Texas Intermediate crude rose 0.3% to $68.86 a barrel, and spot gold rose 0.4% to $2,589.17 an ounce. On the data front, we have US Empire Manufacturing, and on the speaking front, we have ECB Vice President Luis de Guindos and Chief Economist Philip Lane.
