The US currency remains stable and is gaining momentum ahead of the Fed meeting, which cannot be said for Europe. The latter tries to gain a foothold in the areas reached, but these efforts often fall short of expectations.
Steadily rising inflation and an unstable geopolitical background keep market participants and the world’s central banks under tension. Recently, many of them expected the Fed to raise interest rates by 50 to 75 basis points at its next meeting. Now, however, the situation has worsened, so traders and investors are expecting an interest rate hike of 75 basis points or more, or 100 basis points.
Market participants await the Fed’s announcement of its final interest rate decision on Wednesday, September 21. According to preliminary estimates, it should grow by 75 basis points, up to 3-3.25% per year. At the same time, the central bank will present its macroeconomic forecasts, after which Federal Reserve Chairman Jerome Powell will hold a press conference. Against this background, there is tension in the market about the Fed’s future strategy.
According to analysts, the central bank will continue to raise interest rates as long as inflation is under control. Futures currently point to a rate above
% by the end of 2022, implying a further increase at the two Federal Open Market Committee (FOMC) meetings scheduled for early November and mid-December.
Against this background, the pressure on the euro and the attractiveness of the dollar as a hedging asset are increasing. On the morning of Wednesday, September 21, the dollar remained near two-year highs against most currencies, mainly the euro. EUR/USD meanwhile traded at 0.9952, barely above the current range. According to analysts, the Fed’s interest rate decision will set the tone for the coming months in the financial markets.
Currently, the issue of quantitative easing remains in the focus of the market. Central banks are draining liquidity from the financial system and investing less and less of the proceeds from the repayment of government bonds. It should be noted that the Fed, with a balance sheet of $ 9 trillion, is reducing reinvestments by $
7.5 billion per month starting in June 2022. According to preliminary calculations, this figure will rise to 95 billion dollars by the end of September. .
Market participants expect the European Central Bank to reduce its balance sheet by 8 trillion euros. However, the ECB also lags behind the US in this matter. According to ECB President Christine Lagarde, the introduction of quantitative easing is currently impractical. Despite these statements, the central bank is still expected to discuss the issue in its next meeting, which is expected to take place in October.
Against this background, the euro lost some of its gains. Unlike fiat money, common money has difficulty gaining a foothold in current positions. As a result, the euro is constantly sliding down. Even decisive measures by the ECB, which sharply raised interest rates (by 50 basis points and 75 basis points) in the last two meetings, did not change the situation. Thanks to these steps, high inflation will not cause excessive pressure on the euro, analysts believe.
However, the American central bank started raising interest rates earlier than the European one, having gained an advantage in this matter. Currently, the Fed is raising interest rates more aggressively than other central banks. Consequently, the sharp increase in interest rates by the Federal Reserve significantly strengthened the dollar, which continues to rise. At the same time, the appreciation of the USD accelerates inflation in other countries, because the lion’s share of international payments are made in the American currency. When other currencies fall in value against the dollar, imports to most countries fall as dollar goods become more expensive.
The significant strengthening of the American currency weakens the outlook for the global economy, experts emphasize. Above all, developing countries, whose opportunities for economic growth are severely limited, suffer from it. In addition, the strong USD and the global recession will negatively affect the earnings of US companies abroad. The further expansion of the global crisis forces the authorities of several countries to take measures to curb the dominance of the USD, summarize the experts.