Christmas is near and the economic calendar looks quite unattractive, however, Bank of Japan decides on interest rate and in the UK, GDP is released. Naturally, in Japan an unchanged rate seems to be cemented, but it's still not sure what's ahead. In the UK market consensus points to a slight shrink of the economy and again it's about the near future. Today, we're happy to share John Hardy's (Saxo Bank) thoughts.
The Bank of Japan will want to move very cautiously next year as it, and the government, hate when "excess" JPY volatility shakes markets and the outlook for Japan's large exporters. Current BoJ Governor Kuroda's term will end in April, just after the end of Japan's financial year on March 31, and he will not likely preside over any notable shift in policy. There is less pressure at the moment for the Bank of Japan to do anything at all, now that global yields have eased back significantly and the market is ignoring the Fed's latest hawkish forecasts for next year. If inflationary pressures are seen persisting after Kuroda's exit, the new leadership will inevitably have to move to tighten policy, but will try to do so in a slow controlled fashion, with as much pre-announcement of the steps it will take as possible to avoid significant volatility. JPY volatility risks will prove most significant if inflation remains higher than many expect next year, a scenario we think has a high risk, if probably beyond Q1.
John Hardy, Head of FX Strategy at Saxo Bank: The UK economy faces significant head-winds from supply side limitations (shortage of labor and high cost-of-living increases from Europe's energy crisis) and the outlook is made worse by the fiscal austerity from Sunak-Hunt after the chaos triggered by the Truss-Kwarteng "mini-budget". The Bank of England wants to slow down its hiking regime as it sees incoming economic weakness that will be made worse by government pulling spending. Generally, fiscal austerity and a slowdown in BoE tightening may lead to a weaker pound sterling.
