At the beginning of this week, conflicting signals from major economies have disrupted the market. Investors will have a clearer understanding of the recent trends in global monetary policies this week. The Bank of Japan will announce its interest rate decision on Wednesday Beijing Time, while the US Federal Reserve and the Bank of England will announce theirs on Thursday Beijing Time. Traders are struggling to understand whether the Bank of Japan will raise interest rates, and when and how the US Federal Reserve and the Bank of England will cut interest rates.

Due to the uncertainty of policy and economic growth prospects, several markets were tense and uneasy at the close of last week. Wong Kok Hoong, Head of Institutional Equities Sales Trading at Maybank Securities Pte in Singapore, said "This week will be more interesting. And more tiring."

The following is a preview of major central bank policies this week:

Japan Central Bank

The Bank of Japan has rarely raised interest rates in recent years, and it is uncertain what action it will take. Additionally, Bank of Japan Governor Haruhiko Kuroda did not publicly comment before the policy meeting. The latest economic data showed that Japanese inflation is accelerating, but consumer spending is weak. The assumption of further tightening of policies last week pushed the yen sharply higher. Since July 11, the yen has appreciated about 5% against the dollar, partly due to Japanese authorities' intervention in weakening the yen.

The bets of option traders on the Bank of Japan raising interest rates this week rose from less than 40% to nearly 90% last week, fluctuating between the two, highlighting market uncertainty. According to the latest survey, economists are also uncertain. Only 30% of them predicted an interest rate hike, but over 90% of them considered the interest rate hike to be a risk.

The correlation between the yen and leverage investments made through carry trades (borrowing yen to buy high-yielding assets) indicates that fluctuations in the yen can quickly spread to global markets. The recent surge in the yen has made various popular foreign exchange strategies ineffective, from the Australian dollar to the Mexican peso.

If Kuroda does not take action, yen bulls will be hit hard, particularly if expectations of significant cuts in bond purchases by policymakers are also disappointed. However, if the Federal Reserve releases any easing signals later, accelerating people's expectations of a US interest rate cut over the next few months, investors who are bearish on the yen will face a threat.

Charu Chanana, Director of Forex Strategy at Sebon Capital Markets, said: "I'm still bearish on the yen despite the enormous two-way risks before an important week. It seems excessive for a fundamentally dovish central bank to raise interest rates and adjust its bond purchase plan at one policy meeting."

The Bank of Japan will raise interest rates next time?

Investors will closely study the Federal Reserve's policy statement and Chairman Powell's speech for any information that supports expectations of the first rate cut in September. If the Federal Reserve releases a signal of a rate cut in September, it will conform to the views of economists and swap traders who have fully internalized expectations of at least two 25-basis-point interest rate cuts this year. The Federal Reserve's benchmark interest rate is currently in the range of 5.25% to 5.5%, its peak one year ago.

In recent weeks, policymakers have been highlighting that the labor market is balanced and that inflation is falling, indicating that they believe the reasons for lowering borrowing costs in the world's largest economy are becoming more sufficient. James Knightley, Chief International Economist at ING Groep, said: "The upcoming FOMC meeting will lay the groundwork for a rate cut in September, and the Federal Reserve will shift its policy from a restrictive stance to a more neutral one."

Some market observers, from New York Fed President William Dudley to Mohamed El-Erian, Chief Economic Advisor at Allianz, have even proposed more aggressive easing policies than currently expected. Dudley said the Fed should consider cutting interest rates this week, while El-Erian warned that if the Fed maintains interest rates at a high level for too long, there may be a "policy mistake".

By the end of July, US Treasuries were expected to rise for a third consecutive month, the last time this happened was in the middle of 2021. Recent confidence in the rate cut has pushed the Bloomberg US Treasury Index to a two-year high this month. As markets bet on loose monetary policy, the yield on two-year US Treasuries has fallen, narrowing the spread between them and 10-year US Treasuries.

However, the US stock market has been somewhat shaken this week, partly due to the earnings reports of some companies raising doubts about consumer demand. An indicator that measures the implied price volatility of the S&P 500 index this week jumped nearly 1 point higher than the expected volatility in two weeks, showing that current uncertainty is higher than future uncertainty. The market's violent fluctuations demonstrate the importance of traders this week. This week will also see the release of non-farm payrolls in the United States, as well as financial reports from technology giants like Amazon (AMZN.US), Meta Platforms (META.US), Microsoft (MSFT.US) and Apple (AAPL.US), which have been leading the market this year.

Bank of England

There is a disagreement in the market as to whether the Bank of England will make its first interest rate cut since the pandemic on Thursday, lowering the benchmark interest rate from the current 5.25%. Although the UK inflation rate has dropped from double digits a year ago to the Bank of England's target of 2%, unemployment is also rising, and price growth in the service sector is still high, and the economy has rebounded from a small-scale recession. In April, the minimum wage rose 10%, and the new Labor government plans to raise the minimum wage while providing up to 5 million public sector workers with wages higher than the inflation rate, which has brought inflation risks.

Since the July general election, three hawks on the Bank of England's Monetary Policy Committee have given reasons to oppose loose policies. Only one side has presented the opposite view. Whatever the outcome, this decision could have an impact on bonds and the British pound. Forward rate agreements on Friday showed that the likelihood of a 25-basis-point rate cut this week was about 50%, while the market generally expects the Bank of England to cut interest rates twice this year.

Economists believe that the Bank of England will change its stance. Bank of America, Deutsche Bank and Nomura Holdings expect the ratio of decision makers who support interest rate cuts this month to be five to four. ING Groep expects six officials to support this action.

Orla Garvey, senior portfolio manager for fixed-income at Federated Hermes Limited, said: 'In terms of important data, this is an important week, and the Bank of England's August 1st meeting is very timely and will release the latest forecasts.'

Interest rate cuts will boost UK government bonds. The prospect of monetary easing and political stability has boosted UK government bonds since the Labor Party won the election overwhelmingly. The yield on two-year UK government bonds is at its lowest level in over a year.

For the pound, interest rate cuts are not so favorable because they will reduce the attractiveness of the pound as part of carry trades. The pound is the best-performing currency among the Group of Ten (G10) this year, and major banks and investors including JPMorgan and Amundi expect the pound to rise further against the US dollar to 1.35, an increase of nearly 5% from the current level; market call bets have also reached the highest level in history.

Bloomberg macro strategist Cameron Crise said: 'As expected, recent market turmoil has led to some counter-narratives related to stock, fixed-income, and other market positions. This may be a bit dangerous to say, but in some respects, this time it is indeed different from what we have seen before.'