Investors will look to the Federal Reserve for reassurance in the coming week, with little economic data to assuage their concerns over the strength of the global recovery, amid signs Iraq may be sliding into civil war.
The Fed, which wraps up a policy meeting on Wednesday, is expected to keep steadily reducing its massive bond-buying stimulus by $10 billion per month. Financial markets will be listening out for any hints on when the US central bank might begin raising interest rates.
“The Federal Reserve is preparing to move to the second step of the monetary policy exit. With the tapering of asset purchases virtually on auto pilot — QE3 is projected to end in late summer or early autumn — the focus is gradually shifting towards actual rate hikes,” Unicredit said in an investor note.
It said the notion that US monetary policy has reached a turning point could be strengthened if the Fed policymakers' median rate forecast for the end of 2016 stays at 2.25%, where it stood in March, up from 1.75% in December. The matrix of dots for when each rate-setter expects policy to begin tightening - and how quickly — will be keenly scrutinised, as will any comments about rate hikes or slack in the economy from Fed chair Janet Yellen, who speaks after the results of the meeting are released.
While the world's largest economy got off to a weaker than expected start this year, many analysts believe the underlying trend for growth remains solid.
Global stocks are likely to stay on the back foot due to concerns over a growing radical Islamist insurgency in Iraq. The escalating violence in Iraq drove oil prices to a nine-month high on Friday.
The monetary policy outlook will also be in focus in Britain after Bank of England governor Mark Carney stunned the markets by saying rates could rise sooner than financial markets expect.
His comments, which put the British central bank out ahead of the world's other major policy guardians on the monetary tightening front, pushed sterling to near five-year highs against the dollar on Friday.
The Bank publishes the minutes of its June policy meeting on Wednesday, which will be closely watched for signs of any further division among its members on rates, and several of its policymakers will be speaking during the week. The Bank's new Financial Policy Committee, which has the power to rein in an overheating housing market, meets on