Two volatile weeks lie ahead as the Bank of Japan and the Federal Reserve decide their monetary policies. Also, the Italian presidential election is closely watched by euro traders. 

The first trading weeks in the new year are behind, and slowly but surely, the world leaves 2021 behind. Nothing new came out in this period that wasn’t expected – inflation kept rising in December, omicron still spreads, and central banks monitor the situation.

But things are about to change as the second half of January brings into focus three main events that may impact financial markets’ volatility severely: the Bank of Japan’s decision, the Italian presidential election, and the Federal Reserve’s message.

Bank of Japan decision

The Bank of Japan’s monetary policy decisions turned out to be second-tier events for many years. Since the central bank started the yield curve control regime, investors no longer pay attention to the messages sent to markets.

However, next week’s decision may bring something new. There is chatter in the market that the central bank is not comfortable with the rising inflation and may change its wording.

Currently, the Bank of Japan’s outlook emphasizes that the risk to prices of goods and services is skewed to the downside. But Japan is not immune to the global trend of higher inflation during the pandemic.

Recent data points to inflation accelerating sharply, which may lead to a change in the central bank’s outlook. If the bank suggests that the risks are now balanced and not skewed to the downside as before, it signals a u-turn in its policy.

Italian presidential election

On January 24, Europe watches the Italian presidential election. While not a market-moving event normally, this time is different because one of the nominees is Mario Draghi, the current Prime Minister.

If Draghi is elected as President, a new government must form, and thus a period of instability and uncertainty begins. Financial markets do not like uncertainty and were pleased to have Draghi, the former ECB President, holding the top Italian job. A change, therefore, will weigh on the common currency, the euro.

Federal Reserve decision

January 26 brings the Federal Reserve decision and press conference. While the Fed will not raise the federal funds rate at this meeting because it still runs the quantitative easing program, the tone and message may suggest a different path for the rates than the market participants expect.

For example, some voices in the market argue that the Fed needs to be more aggressive in its tightening to regain credibility. With inflation running as high as four decades ago, the central bank appears to have lost its credibility, and a 50 basis points hike in March might be just the thing to do to regain it.

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