Two key central bank decisions sit at the top of investors' radar this week, after renewed global growth concerns saw U.S. stocks sell off on Friday while benchmark yields fell to record lows.
The U.S. Federal Open Market Committee begins its two-day meeting on June 14. Expectations for a summer rate hike were drastically reduced when a sharply lower-than-expected May nonfarm payroll number cast fresh doubts over the health of the U.S. economy.
In the build-up to the June meeting, many Fed officials had made dovish comments. Following the dismal jobs report, Fed chair Janet Yellen spoke at an event in Philadelphia last Monday, where she struck a generally positive tone on the U.S. economy and insisted that the Fed needed to raise rates. She stepped back, however, from putting a time frame.
Experts said they expect Yellen to adopt a similar tone at the press conference that follows the decision.
"Our sense is Yellen's recent speech pre-empted her post FOMC press conference," said analysts at RBC Capital Markets in a note. "We think that this tone will not only find its way into her Q&A but, indeed, into the tone of the statement where on net we do not look for any material changes."
Analysts at Morgan Stanley also pointed out the possible threat of the so-called "Brexit" was a "non-negligible risk" for the Fed.
Britons are set to cast their vote on June 23 in a referendum to decide on whether the U.K. should stay in or leave the 28-member European Union . Polls have shown many British people are in favor of leaving the EU.
"We believe June is not in play as a viable meeting," the Morgan Stanley analysts said. They added persistent headwinds to growth and core inflation, and lingering uncertainty over the global background will see the Fed deliver only one rate hike this year - at its December meeting.
The Bank of Japan (BOJ) begins its policy meeting on June 15. Experts agreed the BOJ might surprise markets with additional easing this week, since the G7 meeting is now over.
The yen, considered a safe-haven play, has climbed against the dollar, despite the BOJ's decision earlier this year to introduce a negative interest rate policy. As of 11:41 a.m. HK/SIN, the currency pair traded at 106.16.
"Even if the BOJ may opt to stay put, further stimulus may only be a matter of time," said Vishnu Varathan, a senior economist at Mizuho Bank. "Fact is, skirting an outright recession is hollow consolation given underlying domestic and external headwinds."
Varathan added the dollar/yen pair could be volatile on both the Fed and the BOJ meetings, but a drop below 105 could "elicit some jawboning."