A quiet session in Asia overnight is offering little direction for European traders ahead of the open on Tuesday, as people appear to position themselves nicely on the fence ahead of two major central bank decisions on Wednesday.
It’s not unusual for traders to adopt a more cautious approach ahead of these events, particularly when we have two on the same day, both of which have the potential to create huge amounts of volatility in the markets.
Markets appear quite confident about what the outcome of the Federal Reserve meeting will be, although they have often thrown a few surprises our way in the past, while the Bank of Japan could do any one of a number of things depending on the outcome of its review, which poses a problem for traders positioning themselves ahead of the announcement.
The BoJ has a particularly difficult job, as it appears to be limited in what it can do to both help it achieve its inflation target, which it is currently far from doing, and appease the markets and prevent the yen appreciating once again, making its job even more difficult.
The move into negative interest rates previously had the opposite effect of what was intended and its experiment with quantitative easing appears to be reaching its limits. If the central bank doesn’t find another alternative, we could once again see the yen catching a strong bid.
We’ll have to wait for this afternoon for some economic data from the US, with building permits and housing starts for August being released. In all likelihood, these are likely to have little impact ahead of tomorrow’s events, with movements in commodities, particularly oil, potentially sparking some life into the markets once again.