Central banks meetings in focus

In the face of a week packed with market holidays and central bank decisions from Washington to London and Tokyo, the dollar remained near a two-decade high on Monday. With US consumer prices rising stubbornly, investors are rushing to price in higher interest rates and a stronger dollar.

Markets are currently pricing in that the Federal Open Market Committee will increase interest rates by another 75 basis points as a result of its meeting this week. There is also a 19% chance of an unprecedented full percentage rise. While, a weak economic outlook will put pressure on other major currencies like the euro, sterling and Australian dollar. 

The pound is on the back foot

There is a split in the markets as to whether the Bank of England will raise rates by 50 basis points or 75 basis points on Thursday. In addition to monetary tightening, on Friday British finance minister Kwasi Kwarteng will deliver an emergency mini-budget that will provide more details on how the government plans to ease the country's cost-of-living crisis.

Euro fell below parity again

With an energy crisis due to hit Europe in the winter, there is little to cheer investors about the euro's fall below parity to $0.995. Inflation's vulnerable response to the current pace of rate hikes could further stretch the extent of the rate. In the Eurozone, the euro bulls have been weakened by gloomy growth predictions from the European Central Bank. ECB's deposit rate is still too low at 0.75% since it continues to stimulate the economy, so the ECB's job is far from over. It is also important to note that higher interest rates will further squeeze demand and accelerate consumer pain.

Bank of Japan’s meeting due this week

Despite all developed-nation central banks rapidly tightening policy to tame inflation, the BOJ will likely continue to offer massive stimulus on Thursday. However, a turning point may come sooner than many policy watchers anticipate since the BOJ recently dropped "temporary" from its description of consumer price increases, even though they are much lower than in places like the US and UK.

Events of the week

In the current week, investors' attention will be firmly focused on the Federal Reserve, which is widely expected to raise interest rates for a third consecutive time on Wednesday. UK, Swiss and Japanese central bank policymakers will also meet during the week in the ongoing battle against inflation. As a result, US stocks look set for another volatile week amid concerns that higher interest rates will hurt the economy. 

There are also several holidays this week, including one off on Monday for Japan and Britain, another on Thursday for Australia, and yet another on Friday for Japan. These holidays could result in depressed liquidity, hence in sharper price moves.