As markets enter a phase of policy watchfulness, a wave of critical economic data and central bank meetings is setting the stage for potential shifts ahead. This week, investors are fixated on a trio of key U.S. reports—first-quarter GDP growth, core PCE inflation, and the nonfarm payrolls—while eyes also turn toward the Bank of Japan’s policy meeting, where broader repercussions from the U.S.’s latest tariff hike will be assessed. Together, these data points and policy decisions are expected to shape capital flows and investor risk appetite, prompting a more cautious tone in global markets.

In the U.S., the first estimate of Q1 GDP takes center stage. The Federal Reserve Bank of Atlanta’s real-time model suggests the economy may have contracted 2.2%, a sharp contrast to the consensus forecast of 0.4% growth. This points to growing pressure on business supply chains and exports stemming from the new tariff measures. Meanwhile, the core personal consumption expenditures (PCE) inflation rate for March is expected to show a year-over-year increase of 2.5%—cooler than February’s 2.8%, but still above the Federal Reserve’s inflation target.

On the jobs front, all eyes are on Friday’s upcoming nonfarm payrolls report. Markets are projecting job gains of around 130,000, a notable slowdown from the previous month’s strong 228,000. Private sector employment data released earlier showed a pullback in hiring while wage growth held steady, signaling early signs of a gradual labor market cooldown. Even so, labor force participation and the unemployment rate remain stable, suggesting no immediate signs of economic contraction.

The Federal Reserve now faces a policy dilemma. On one hand, slowing economic activity and weak consumer sentiment are bolstering calls for a rate cut this year. On the other, sticky inflation—especially in services and wages—limits the Fed’s room to ease. Market expectations for a rate cut as soon as June are rising, but several Fed officials have recently emphasized the importance of maintaining current rates until inflation shows consistent, sustainable improvement. This suggests the Fed may remain on hold until at least the end of the second quarter.

Over in Asia, the Bank of Japan’s Thursday meeting will be closely scrutinized. Although Japan’s inflation and wage data have improved in recent months, the rising tide of U.S. trade protectionism is presenting new challenges for Japan’s export-driven economy. Markets widely expect the BoJ to downshift its 2025 growth outlook, reflecting a more cautious stance about the economy’s trajectory. Within the central bank, some policymakers favor waiting to assess the impact of earlier rate hikes, while others advocate continuing gradual normalization to avoid letting inflation expectations slip out of control.

This uncertainty has increased the yen’s appeal as a safe-haven asset, leading to a sharp rally. The yen recently touched 152 against the dollar, its strongest level in nearly three years, prompting speculation on whether Japan’s financial authorities will intervene in the currency market again.

As policy shifts and geopolitical risks intersect, investors have begun to reallocate their portfolios. Yields on U.S. 10-year Treasuries have pulled back, and gold prices continue to hit new highs—both signs of a pickup in demand for safe assets. At the same time, investors are rotating into defensive sectors such as healthcare and utilities, while taking profits on technology and export-sensitive stocks. The U.S. dollar, weighed down by uncertain job market and policy direction, remains under pressure. If this week’s data disappoints further, the dollar index could slip below the psychological 100 mark, pushing other major currencies higher.

In short, whether the U.S. economy can withstand the twin headwinds of tariffs and high interest rates, and whether the Bank of Japan stays the course on its policy path, are set to be pivotal forces shaping global markets. The flood of data this week won’t just guide central bank timelines, but also influence how investors position their portfolios going forward. In a fast-changing, increasingly uncertain environment, nimbleness in asset allocation and a disciplined approach to risk management are more important than ever. Investors should watch closely for structural shifts in inflation and developments in the labor market as key indicators for adjusting their strategies.