The US Federal Reserve is set to announce its latest monetary policy decision on Wednesday, 31st July at 2:00 PM Eastern Time, which corresponds to 2:00 AM on 1st August in Malaysia.

The decision is expected to significantly influence US markets, which currently anticipate the central bank will hold interest rates steady.

September Rate Cut for US on Horizon?

Recent economic data has investors eyeing a potential rate cut as soon as September.

According to Deutsche Bank chief US economist Matthew Luzzetti, the Fed's tone and Chair Jerome Powell's press conference will signal whether a rate cut is on the horizon. This comes as the core Personal Consumption Expenditures (PCE) index, the Fed's preferred inflation gauge, rose 2.6% over the prior year - its lowest annual increase in more than three years. Separately, data showed a significant decrease in another key inflation metric, the Consumer Price Index (CPI).

Furthermore, the labour market has displayed signs of cooling, with the ratio of job openings to unemployed workers returning to pre-pandemic levels and the unemployment rate reaching its highest point since November 2021.

These developments have prompted markets to price in the Fed's first rate cut in September. Investors will be closely watching Jerome Powell's post-meeting press conference on Wednesday for any confirmation or indication of a potential rate reduction in the coming months.

BoJ Hikes Rates Hours Ahead of Fed Decision

During midday on 31st July, Malaysia time, the Bank of Japan (BOJ) has announced the decision to raise interest rates and reduce the scale of its government bond purchases at its monetary policy meeting that concluded on July 31st. This marks the first rate hike by the BOJ since it abandoned its negative interest rate policy back in March.

Specifically, the BOJ raised its policy rate from the current 0% to 0.1% range up to around 0.25%.

The BOJ's hawkish tilt comes just hours before the US Federal Reserve's upcoming policy meeting, and may signal a turning point for the embattled Japanese yen. Traders believe the narrowing interest rate differential between the US and Japan will support this trend. Any dovish signals from the Fed about a potential September rate cut will further bolster this view.

Following the BOJ's rate decision announcement, both the Japanese stock market and the USD/JPY exchange rate experienced significant volatility, initially dipping before rebounding. As of 12:20 pm Beijing time, the USD/JPY was trading around 153.06, up 0.18% on the day, while the Nikkei 225 index hovered near the flat line.

The modest increase in rates still leaves a relatively high interest rate differential, and given the high proportion of carry trades, the impact on carry trades is expected to be limited, according to a research note from CICC.

An 87%+ Chance of Monetary Easing

According to the CME FedWatch tool, bond traders peg the odds of a September rate cut at nearly 87.7% as of 15:23 PM, 31st July, Malaysia time.