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As expected, ECB officials pointed to a possible interest rate hike of 0.25% in July and a further tightening in September. On the inflation side, they expect a figure of around 6.8% in 2022, 3.5% in 2023, and 2.1% in 2024. The report cites the conflict in Ukraine as the main reason for the deteriorating economic condition in Europe.
As for QE, members of the ECB agree on the fact that net debt purchases under its government asset purchase program should end in July. Looking forward, it will fully reinvest the principal of the bonds purchased that mature over an extended period of time after it begins to raise interest rates “with full flexibility” and the instruments at its disposal or new instruments “if necessary”.
A more hawkish approach triggered a risk-off mood among investors: the dollar index DXY, meanwhile, rose by 1.98% to 104.19 and the yield on the 10-year Treasury bond went above the 3.15% mark. Analysts at Goldman, Deutsche Bank, and Credit Suisse expect the rate to reach 1% in December. The problem is that as monetary policy tightens, so will the debt burden. Can Europe avoid a new debt crisis? The weakening of the euro indicates that investors are not very optimistic about that.
What about the UK? USD/GBP is up 10.76% this year. Weak economic data and fears of impending financial Armageddon are not hard to blame. The Bank of England is expected to raise rates again at Thursday’s meeting by 25 basis points to 1.25%. With inflation in the country set to reach 10.25% by the end of the year, up from 5.75% previously forecast, the regulator’s members could also announce more drastic measures.
The Japanese yen, in the meantime, remains under pressure. Despite the verbal intervention, the USD/JPY continues to rise. The situation has reached the point that the government, together with the local regulator, have issued a joint statement expressing their concern about the recent sharp fall of the yen. Does this mean that Tokyo will intervene in the currency market after all? The answer to this question will be known at Friday’s central bank meeting. Given that the tightening of the yield target to 0% is more important than the yen’s exchange rate, there is no reason to expect monetary tightening.
Last but not least, the geopolitical environment continues to deteriorate. Apart from Brexit and war in Ukraine, Israeli Prime Minister Naftali Bennett said that Iran is close to obtaining nuclear weapons. The problem is that Israel and the US have long talked about the need for a “plan B” in case diplomatic methods of finding compromises on the Iran nuclear deal run out of steam. What does the alternative course of action entail? Entering Iranian airspace and attacking Iran’s nuclear facilities.
