Betting on intense fluctuations! The market anxiously awaits the "shoe to drop", will the central banks of the US, UK, and Japan undergo a major shift this week?

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

Due to the uncertainty surrounding policies and economic growth prospects, several markets closed last week with a sense of nervousness. Wong Kok Hoong, Head of Stock Sales Trading at Maybank Securities Pte. in Singapore, said: "This week will be more interesting. And probably more tiring."

Here is a preview of the major central bank policies for this week:

Bank of Japan

The Bank of Japan has rarely raised interest rates in recent years, but there is uncertainty in the market about what actions it will take. Additionally, Bank of Japan Governor Haruhiko Kuroda did not make any public comments before the policy meeting for the first time. The latest economic data shows that inflation in Japan is accelerating, but consumer spending is weak. Assumptions about further tightening of policy last week drove the yen sharply higher. Since July 11, the yen has appreciated by about 5% against the US dollar, partly due to Japanese authorities intervening to weaken the yen.

Option traders' bets on a rate hike by the Bank of Japan this week rose from below 40% to nearly 90% last week, then fluctuated between the two, highlighting market uncertainty. According to the latest survey, economists are also uncertain, with only 30% predicting a rate hike, but over 90% seeing it as a risk.

The interconnection between the yen and leveraged investments through carry trades (borrowing yen to purchase high-yield assets) indicates that sharp fluctuations in the yen can quickly spread to global markets. The recent surge in the yen has rendered various popular forex strategies ineffective, from the Australian dollar to the Mexican peso.

If Kuroda does not take action, yen bulls will suffer, especially if policymakers disappoint expectations of significant cuts in bond purchases. However, if the Federal Reserve later signals any easing, accelerating expectations of rate cuts in the US in the coming months, investors shorting the yen will face threats.

Charu Chanana, Head of Forex Strategy at Shengbao Capital Markets, said: "I still favor yen shorts, despite significant two-way risks ahead of an important week. Expecting the Bank of Japan to raise rates at one meeting and adjust bond purchase plans—seems a bit excessive for a fundamentally dovish central bank."

Federal Reserve Investors will carefully study the policy statement of the Federal Reserve and the speech of Federal Reserve Chairman Powell to look for any information supporting the expectation of the first rate cut in September. If the Federal Reserve signals a rate cut in September, it will align with the views of economists and futures traders who have fully priced in expectations of at least two 25 basis point rate cuts this year. The Federal Reserve's benchmark interest rate is currently maintained in the range of 5.25% to 5.5%, which was the peak reached a year ago.

In recent weeks, policymakers have been pointing to a balanced job market and declining inflation, indicating that they believe the reasons for lowering borrowing costs in the world's largest economy are becoming increasingly compelling. James Knightley, Chief International Economist at ING, stated, "The upcoming FOMC meeting will set the stage for a rate cut in September, as the Federal Reserve shifts its policy from a restrictive stance to a more neutral position."

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

By the end of July, U.S. Treasuries were set to rise for the third consecutive month, a situation last seen in mid-2021. Recently, growing confidence around a rate cut has driven Bloomberg's U.S. Government Debt Index to a two-year high this month. As markets bet on imminent loose monetary policy, the yield on 2-year U.S. Treasuries has fallen, narrowing the spread with 10-year U.S. Treasuries.

However, the U.S. stock market has been slightly shaky this week, partly due to earnings reports from several companies raising doubts about consumer demand. An indicator measuring implied price volatility for the S&P 500 index this week jumped by nearly 1 point above expectations for volatility two weeks later, indicating current uncertainty is higher than future uncertainty. The market's sharp fluctuations highlight the importance of traders this week. This week will also see the release of the U.S. non-farm payrolls report, and tech giants like Amazon (AMZN.US), Meta Platforms (META.US), Microsoft (MSFT.US), and Apple (AAPL.US) - which have led the market this year - will also announce their earnings Bank of England

There is a divergence in the market on whether the Bank of England will cut interest rates for the first time since the pandemic on Thursday, lowering the benchmark rate from the current 5.25%. Although the UK inflation rate has dropped from double digits a year ago to the Bank's target of 2%, the unemployment rate is rising, but price growth in the service sector remains high, and the economy has rebounded from a minor recession. In April, the minimum wage increased by 10%, and the new Labour government plans to raise the minimum wage while providing wages above the inflation rate for up to 5 million public sector workers, posing risks of price increases.

Since the July general election, three hawkish members of the Bank of England's Monetary Policy Committee have raised objections to loose policies. Only one side of the two factions has presented opposing views. Regardless of the outcome, this decision could have an impact on bonds and the pound. Last Friday, forward rate agreements indicated a 50% chance of a 25 basis point rate cut this week, while the market generally expects the Bank of England to cut rates twice this year.

Economists believe that the Bank of England will change its stance. Bank of America, Deutsche Bank, and Nomura Holdings expect a five-to-four ratio in favor of a rate cut decision this month. ING Group expects six officials to support this action.

Orla Garvey, Senior Portfolio Manager of Fixed Income at Federated Hermes Limited, said: "In terms of important data, this is an important week, and the Bank of England's meeting on August 1 is very timely and will announce the latest forecasts."

Interest rate cuts will boost UK government bonds. The prospect of monetary easing and hopes for political stability have boosted UK government bonds after the Labour Party won the election by a landslide. The yield on 2-year UK government bonds is at its lowest level in over a year.

For the pound, a rate cut is not so favorable as it will reduce the attractiveness of the pound as part of carry trades. The pound is the best-performing currency in the Group of Ten (G10) this year, with major banks and investors including JP Morgan and Amundi expecting the pound to rise further against the dollar to 1.35, up nearly 5% from current levels; market bullish bets have also reached historic highs.

Cameron Crise, Macro Strategist at Bloomberg, said: "As expected, recent market turmoil has sparked some counter-narratives related to equities, fixed income, and other market positions. It may be somewhat dangerous to say this, but in some ways, this time is indeed different from what we have seen before."