Foreign exchange market update: Central banks
- Currency exchange
Central banks make big noise
The financial markets have been confronted with surprising new developments almost on a daily basis over the past few days and weeks.
The European Central Bank (ECB) has ended its asset purchase program and is preparing the market for rate hikes. At the beginning of this year, a rate hike in Europe was a long way off, whereas interest rates increased by 75 basis points in the USA. The last time such a drastic increase in rates happened was back in the 1990s. The US key interest rate is now in a target range of 1.5 – 1.75 percentage points. The Swiss National Bank (SNB) also caused a stir with a surprise interest rate hike of 50 basis points that caught the market on the wrong foot.
All of these steps can be fundamentally justified by persistent inflation, with malicious tongues claiming that the ECB has already missed the window to contain inflation. We can be curious to see whether the ECB will also make a move that is not expected by market participants. A sharp increase in interest rates by more than 25 basis points is currently not expected in July. The situation for monetary authorities in Europe is not easy. Rising interest rates too far, too quickly puts heavily indebted member states under pressure. Italy already has to pay 4 percentage points to raise fresh capital over a term of 10 years – a few weeks ago the interest rate was just over 2 percent.
The central banks create a lot of noise and uncertainty on the financial markets. It is questionable how long the move away from the very loose monetary policy will last. This will be directly linked to the price development on the commodity markets. The price development for electricity, gas and oil in particular will be decisive here. Peace in Europe and a normalization of supply chains can dispel the specter of inflation just as quickly as it came.
US inflation over the last 10 years:
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Please note that this elaboration was completed on 17/06/2022 14:54 CET.
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