FOMC and BoJ in the Crucial Week Ahead, Brace For High Volatility

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There is a very high degree of uncertainty over market developments in the week ahead, but a fresh surge in volatility is guaranteed.

The Federal Reserve will announce its latest policy decision on Wednesday a few hours after the latest Bank of Japan announcement. Their decisions are likely to have a big short-term impact and an important influence on market direction for the remainder of 2016.

Even though there are expectations that the Fed will leave interest rates on hold, the FOMC is likely to be much more divided than in recent meetings with the more hawkish members, concentrated mainly among the regional Fed banks, clashing with more dovish voices on the committee.

This clash increases the risk of a surprise announcement and dissent within the committee, especially with Chair Yellen making only very limited policy comments.

At this stage, there is no consensus on what the Bank of Japan is likely to announce, increasing the chances of a very erratic market reaction.

The uncertainty has been compounded by the fact that the bank will announce the outcome of its policy review. There has been conflicting advice from government advisors and a lack of consistency by Governor Kuroda. There are clear differences of opinion within the Board itself, although there has been a commitment not to tighten policy.

There is also uncertainty surrounding moves to steepen the yield curve and there will be an important impact on global bond markets.

There was a mini tantrum in bond markets earlier this week as long-term rates surged and the Bank of Japan announcement is likely to trigger another sharp reaction in global bonds.

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