Weekly Market Outlook: BoJ Rate Hike, FOMC Under Warsh, and Global Risk Sentiment

U.S.-Iran Deal Sets Calm Tone Amid Busy Central Bank Calendar

The week opened with a de-escalation in geopolitical tensions as the U.S. and Iran agreed to a peace deal, reopening the Strait of Hormuz. This reduced immediate supply chain risks, offering a tentative boost to risk sentiment. Monday lacks major FX catalysts, but Tuesday’s Bank of Japan (BoJ) policy announcement and Reserve Bank of Australia (RBA) meeting will set the tone for the week.

BoJ Expected to Raise Rates, JPY Reaction Muted

The BoJ is poised to hike its policy rate by 25 basis points to 1.00%, marking continued normalization. However, uncertainty around Governor Ueda’s health could delay the move. Rising wages and fiscal stimulus have pushed Japan’s core-core inflation to 2.8%, above the 2.0% target. While the rate hike is priced in, the JPY may struggle for direction amid dominant global factors like energy prices and U.S. monetary policy. Wells Fargo analysts suggest medium-term yen strength could emerge if BoJ tightening persists.

RBA Likely to Hold, Eyeing Second-Half Tightening

The RBA is expected to keep rates at 4.35% following Governor Bullock’s emphasis on pre-war inflation dynamics. A softer April CPI reading provides near-term flexibility, but Westpac warns that rising input costs may reignite pricing pressures. Markets anticipate further tightening in late 2026, contingent on labor market and inflation trends.

U.S. Retail Sales and FOMC in Focus

U.S. retail sales data for May will precede the FOMC meeting, the first under Fed Chair Kevin Warsh. Consensus forecasts 0.5% m/m growth, though real demand remains tepid amid elevated fuel costs. The Fed’s patient stance is likely, with core PCE inflation still above target and unemployment near the upper end of full-employment estimates. Attention will center on the policy statement’s language shift and dot plot adjustments, which may signal a tighter 2026 median rate outlook.

BoE and SNB Meetings Highlight Policy Divergence

The BoE is set to hold rates steady, with inflation data due Wednesday. Analysts expect a 7-2 vote split, as Chief Economist Huw Pill may gain support for hikes. Meanwhile, the SNB will likely keep rates at 0.00%, wary of CHF strength amid subdued 0.6% y/y inflation. Traders will monitor FX intervention signals.

Risk Sentiment and Technical Considerations

Geopolitical de-escalation supports risk appetite, though energy price volatility and central bank divergence could cap gains. The DXY faces headwinds from Fed caution, while JPY and AUD remain sensitive to BoJ and RBA policy trajectories. Technical levels in major pairs will hinge on data surprises and policy signals.

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