Busy week with central banks' meetings amid the fog of war

The dollar fell as European markets opened on Monday but remained near a five-year high versus the yen as investors prepared for a busy week of central bank meetings. U.S. stock markets are expected to open higher Monday, hoping that a diplomatic solution to the Ukraine war can be reached. The European Union's finance ministers are expected to meet later Monday, in light of the risks to growth brought on by Russia's invasion of Ukraine, which came just as Europe was starting to recover from the pandemic.

Ukraine's talks are continuing to progress

Russia and Ukraine are currently engaged in peace talks, and American officials are travelling to Rome to warn China against undermining western sanctions and supplying military aid to Russia. China's stock market plunges as the manufacturing hub of Shenzhen is forced into a Covid-19 lockdown. Iran has also attacked targets in Iraq that are considered to be U.S. and Israeli targets, complicating efforts to restart talks on its nuclear program. 

Fed's meeting 

Investors will be watching closely to see how the Fed assesses the impact of the war in Ukraine on interest rates. Despite soaring inflation, which is at 7.9%, far above the Fed's 2% target, the Fed has signalled it will hike interest rates by 25-points after its two-day policy meeting concludes on Wednesday.

There is no longer any possibility of a larger 50-point rate hike since Russia's invasion of Ukraine sent commodity prices soaring and created significant uncertainty in financial markets.

Commodity rallies have increased the pressure on central banks to tighten monetary policy and curb inflation. However, this has stirred concerns that rising interest rates will hamper economic growth at a time when consumers are already feeling the pinch from high prices.

Investors will be eager to see how the war affects the Fed's monetary policy outlook upon releasing the Fed's updated 'dot plot' this week. This plot tracks projections for interest rates. Also, investors will be looking for any information regarding plans for the central bank's almost $9 trillion balance sheet.

BoE's meeting

BOE officials are expected to hike rates for the third time since December at their meeting on Thursday but are likely to opt for a 25-point move rather than a 50-point increase. As a way of mitigating against the risk of high inflation becoming entrenched, BOE Governor Andrew Bailey is expected to signal more rate hikes. The U.K. consumer inflation rate rose to 5.5% in January, a record high due to higher energy prices and supply chain bottlenecks. As living costs rise, the U.K. will release its latest employment report on Wednesday, which could shed light on the earnings component of the information ahead of the BOE meeting.