BoJ disappoints with no QE change, now market awaits BoE's monetary policy response to Brexit

July 29, 2016 01:51 PM

The U.S. Federal Reserve and the Bank of Japan (BOJ) showed the two sides of central bank action this week. The Fed's Federal Open Market Committee (FOMC) ended with no change to the U.S. benchmark interest rate. The lone dissenter was once again Federal Reserve Bank of Kansas City President Esther George. The main take away from the statement was the less dovish "Near-term risks to the economic outlook have diminished" but it was not enough to lend any support the USD who was down against majors.

The Bank of Japan (BOJ) has been under pressure as the early momentum from Abenomics since 2014 has eroded and the Japanese economy is again facing strong deflationary pressures. BOJ Governor Haruhiko Kuroda did not offer a repeat of his bold quantitive easing program launch of 2014 and instead opted for a minor update to the EFT purchasing program keeping the size of the QE intact and not discussing other options such as longer term bonds or use of helicopter money. The JPY promptly appreciated and is once again knocking on the 100 level.

The Bank of England (BoE) Super Thursday on Aug. 4, starts at 7:00 am EDT with the release of the Inflation Report, MPC bank rate votes, the MPC summary and the official bank rate. BoE Governor Mark Carney will address the financial press at 7:30 am EDT. The BoE is heavily anticipated to deliver a combination of stimulus measures. A rate cut is expected to the 0.50% interest rate along with a possible QE program upgrade a less likely outcome but still worthy of consideration by the central bank.

The EUR/USD lost 1.367% in the last 5 days. The pair is trading at 1.1166 after a cautious Fed made no changes to its benchmark interest rate on Wednesday and the advanced GDP was only 1.2% in the second quarter when 2.6 had been the consensus forecast. The slowdown in U.S. growth is a concern for the USD even as three major central banks need to step up their easing efforts. The European Central Bank (ECB) stood pat in July but the Brexit fallout will have President Draghi looking for a way to boost growth beyond the already impressive QE and negative rate options.

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