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Central banks to set the tone for markets this week

After the highly anticipated "bazooka" was fired by European Central Bank chief Mario Draghi last week, investors will be closely following a week packed with central bank statements and meetings.

While none is expected to deliver the kind of major policy changes we saw at the ECB's meeting on Thursday, the monetary policy meetings will be closely watched as the direction of interest rate policy has become a key concern for markets this year.

U.S. Federal Reserve Chair, Janet Yellen (l), ECB President, Mario Draghi (c) and Bank of Japan Governor Haruhiko Kuroda (r).
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U.S. Federal Reserve Chair, Janet Yellen (l), ECB President, Mario Draghi (c) and Bank of Japan Governor Haruhiko Kuroda (r).

Top of the agenda is the latest Federal Open Market Committee (FOMC) meeting in the U.S., which concludes on Wednesday.

While policy is widely anticipated to remain unchanged, the Federal Reserve's updated economic forecasts and Chair Janet Yellen's post-meeting press conference will be scrutinised for signals about the near-term policy outlook and the desire of the Committee to get rates higher again.

"Given the likely downward revision to the Fed's GDP growth forecast in the current year (from 2.5 percent), the dot plots of FOMC member views will likely signal a slower pace of further hikes over the remainder of the year, with the median expectation of the federal funds rate (ffr) at end-2016 likely to be pushed lower by 25 or 50 basis points from the range of 1.25 - 1.50 percent signalled at December's meeting," said head of research at Daiwa Capital Markets, Grant Lewis.

Ahead of the Fed meeting is the Bank of Japan's (BOJ) first Policy Board meeting since it first introduced negative rates at the start of the year, scheduled for Tuesday.

Most economists expect no changes, but analysts are expecting some moves in foreign exchange markets, as the Fed meeting follows so closely.

"The BOJ's decision to cut rates in a 5-4 vote in the midst of market turmoil six weeks ago back-fired but the backdrop is different today. The Nikkei has bounced 16 percent from its mid-February lows, and 10-year Treasury yields are 30 basis points higher," said global macro strategist at Societe Generale, Kit Juckes.

"We don't expect any action from the BOJ when their meeting ends tomorrow, but even so, the likelihood of a hawkish tone from the FOMC on Wednesday and the bright underlying tone to risk sentiment makes long dollar/yen look like a good risk-reward trade here," he added.

Thursday brings the latest policy announcement from the Bank of England, where the Bank Rate will likely remain unchanged at 0.5 percent but a dovish tone from the central bank is expected nonetheless.

"Following the wide ranging package of measures from the ECB, Thursday's MPC decision is set to be far less exciting, with policy certain to remain unchanged, with Bank rate at 0.5 percent and the level of Quantitative Easing at £375 billion ($537 billion). The minutes should also show a unanimous decision for no change, given Ian McCafferty dropped his call for tighter policy at February's meeting," said chief economist at Investec, Philip Shaw.

Other bank decisions this week include the Swiss National Bank (SNB) and Norway's Norges Bank, both on Thursday.

The Norwegian central bank is expected to cut rates by 25 basis points to 0.5 percent after indicating at its meeting in December of the probability of a cut in March.

"We estimate that markets are pricing in roughly 75 percent probability of a 25 basis point March rate cut, an accumulated 30 basis point rate cut for the June meeting and an accumulated 46 basis point worth of cuts on a 12- month horizon," analysts at Danske Bank said in a research note on Monday.

The SNB is also not expected to announce any changes this week, with the deposit rate already firmly in negative territory at -0.75 percent, meaning a further rate cut would take it close to the "critical lower bound" for interest rates according to Credit Suisse.

"The SNB could respond to immediate appreciation pressures on the Swiss franc with purchases of foreign currencies," analysts at Credit Suisse said.