Here it comes, the "most exciting 32 hours" in the global market!

Author: Zhao Ying, Wall Street Journal This week, the central banks of the U.S., Japan, and the U.K. will hold consecutive monetary policy meetings, bringing the global financial markets into the "most exciting 32 hours."
On Wednesday morning, the Bank of Japan will take the lead, possibly raising interest rates while reducing its balance sheet, becoming the highlight of the week;
Following that, in the early hours of Thursday, the Federal Reserve will announce its highly anticipated interest rate decision, and later, Powell will hold a monetary policy press conference. The market generally expects a signal for rate cuts to prepare for action in September;
Finally, on Thursday evening, the Bank of England will make its appearance, potentially implementing its first rate cut in four years, with the market expecting a reduction of 25 basis points.
In just 32 hours, the results of three major interest rate decisions will be released, stirring the global stock, bond, and currency markets, adding turmoil to an already uneasy market.
Recently, the yen and pound have surged, and the decline in U.S. short-term Treasury yields has made multiple markets appear tense and uneasy at the close last week due to unclear policy and economic growth prospects.

1. Bank of Japan Takes the Lead

The Bank of Japan's decision-making is highly anticipated, possibly overshadowing the Federal Reserve.
Japanese authorities have indicated that this meeting will announce details of the plan to reduce monthly bond purchases, with the market generally expecting the purchase amount to decrease from 6 trillion yen to 5 trillion yen, ultimately halving the purchase amount within two years.
There is also a possibility of raising interest rates, but only about 30% of economists consider this scenario as the baseline.
Recent economic data from Japan shows accelerating inflation but weak consumption, increasing uncertainty in decision-making. The yen has appreciated about 5% against the dollar since July 11, reflecting market expectations for policy tightening. However, investor expectations for rate hikes have fluctuated significantly, soaring from less than 40% last week to nearly 90%, and then falling back to around 50%, highlighting market confusion.
As a popular carry trade tool, the recent strength of the yen has affected global assets, with Japanese stocks pausing their upward trend, offshore yuan rising to a more than one-month high, and currencies like the Australian dollar and Mexican peso being impacted.
Analysts believe that if the rate hike does not materialize, especially if the central bank's bond purchase plan is not reduced as expected, shorting the yen could "make a comeback," leading to severe volatility that could quickly affect global markets. If the Bank of Japan remains inactive, it may catch yen bulls off guard; however, if the Federal Reserve subsequently signals accelerated rate cuts, yen bears will also face risks.
Charu Chanana, head of forex strategy at Saxo Capital Markets, stated:
"Although the risks are significant in both directions this week, I remain bearish on the yen. It seems a bit far-fetched to expect a fundamentally dovish central bank to raise rates and adjust its bond purchase plan in one meeting."

2. Federal Reserve Decision Highly Anticipated

Investors will closely monitor the Federal Reserve's policy statement and Chairman Powell's speech for clues supporting the first rate cut in September.
Economists and swap traders generally expect at least two 25 basis point cuts this year, with the Federal Reserve's benchmark rate currently in the range of 5.25% to 5.5%.
Recently, Federal Reserve officials have frequently mentioned the cooling labor market and falling inflation, suggesting they believe the conditions for rate cuts are maturing.
James Knightley, chief international economist at ING, stated:
"The upcoming FOMC meeting will lay the groundwork for a rate cut in September, as the Federal Reserve prepares to shift its policy from restrictive to neutral."
Some market observers have proposed more aggressive easing policies than currently expected, including former New York Fed President Dudley and economist El-Erian. Dudley stated that the Federal Reserve should consider a rate cut this week, while El-Erian warned that maintaining excessively high rates for too long would be a "policy mistake."
U.S. Treasury bonds are expected to rise for three consecutive months, the first time since mid-2021. Confidence in rate cuts is growing, pushing the Bloomberg U.S. Treasury Index to a two-year high this month. As bets on easing monetary policy emerge, the yield spread between 2-year and 10-year Treasury bonds is narrowing. Last week, the U.S. stock market also experienced significant turbulence, with earnings reports raising doubts about consumer confidence.

3. Bank of England May Face First Rate Cut

The Bank of England is expected to implement its first rate cut in four years, but there are still divergences in the market.
Although the inflation rate has fallen from double digits a year ago to the 2% target and the unemployment rate has risen, service sector price growth remains strong, and the economy has rebounded from a slight recession. The minimum wage was raised by 10% in April, and the new Labour government plans to increase public sector wages, both posing upward inflation risks.
Since the July election, three hawkish members of the Bank of England's Monetary Policy Committee have opposed easing policies, while among the two dovish members, only one has expressed the opposite view.
Regardless of the outcome, this decision will impact bonds and the pound. As of last Friday, the swap market estimated the probability of a 25 basis point rate cut this week at about 50%, and the likelihood of two rate cuts within this year is nearly certain, with economists generally believing the Bank of England will take action.
The pound has performed the best among G10 currencies this year, but a rate cut may weaken its appeal as a carry trade. Major banks and investment institutions like JPMorgan and Amundi expect the pound to rise further against the dollar to 1.35, nearly a 5% increase from current levels.