Markets focus on central bank decisions

[The Bank of England is expected to raise interest rates by 50 basis points]

Economists and financial market prices predict that the Bank of England will raise interest rates by 50 basis points on February 2, raising interest rates to 4%, the highest level since 2008, although there is also a risk of a small increase to 3.75% . Economists will be watching closely for signs that the 10th consecutive hike will be the last from the BoE.

[The Federal Reserve may lower interest rates to 25 basis points]

At the upcoming interest rate meeting, the Fed will reduce the rate hike to 25 basis points and will work overtime to ensure that the market does not think that the rate hike is over. The Federal Reserve will hold an interest rate decision at 03:00 on February 2, Beijing time. While the U.S. has good news on inflation and is one step closer to completing rate hikes, it may be too soon for the Fed to stop raising rates, indicating that it may be too soon to stop raising interest rates.

[The market believes that the Fed is about to end raising interest rates]

The market believes that the Fed is about to finish raising interest rates. However, with too much inflation in the system, the Fed may be signaling that more action is needed. The Federal Reserve insists on the prediction of the dot plot, and will continue to raise interest rates in the future, with a rate increase of 25 basis points. The Fed's annual inflation rate remains more than double the Fed's target. From a month-on-month perspective, the number first rose and then ended a continuous decline. Gold prices will struggle ahead of the Fed decision on Feb. 1, and what happens thereafter will be key.

[Market focus shifts to central bank policies of various countries this week]

Investors turned their attention to this week's policy meeting of global central banks, including the Federal Reserve, for further clarity on their strategy for future rate hikes. U.S. consumer spending fell for a second straight month in December, putting the economy on a lower growth trajectory heading into 2023, so investors awaited the Fed's latest policy guidance amid expectations of a further slowdown in the Fed's pace of rate hikes.

[The situation in the euro zone and the UK is very different]

The European Central Bank and the Bank of England also meet this week and are both expected to raise interest rates by 50 basis points, but they are in very different positions. Germany and France, the two largest economies in the euro zone, have seen limited downward momentum since the beginning of the year, suggesting that a recession is by no means a foregone conclusion. The Bank of England, by contrast, faces a particularly difficult choice.

[Market sentiment improves, the outlook for the euro zone remains uncertain]

Economic sentiment in the euro zone rebounded for a third straight month, suggesting the worst of the energy crisis is over. Still, the outlook for the euro zone economy remains uncertain. The sharp deterioration in economic confidence in the euro area over the past few months has not led to a sudden collapse in economic activity, and this improvement is not now expected to translate into growth momentum for the euro area economy in the first half of 2023.

[Conjectures on the normalization of monetary policy will put pressure on USD/JPY]

Rising inflation and ongoing speculation about the Bank of Japan's monetary policy could offset the typical negative impact of further quantitative easing by the Bank of Japan to maintain its yield curve control (YCC) program. The BOJ has stuck to its pledge to buy unlimited amounts of Japanese government bonds as part of the YCC program to enforce a cap on 10-year yields of 0.5%, and has intervened frequently throughout January. Speculation that the Bank of Japan will start normalizing monetary policy in the coming months will keep USD/JPY under pressure.

[CAD still has room to stay ahead in the coming weeks and months]

Following last week's decision by the Bank of Canada to raise interest rates by 25 basis points, financial markets continued to bet that the cash rate would eventually be cut by the end of the year, even though the market believed that the resilience of the Canadian economy could invalidate those bets. Canada's economic outlook and other factors mean the loonie still has room to maintain its lead among major currencies in the weeks and months ahead. But as the outlook for interest rates is closely tied to economic conditions and whether inflation declines as much as the Bank of Canada expects, Canadian economic data may still be an important factor in determining the direction of the loonie.