The euro fell more than 0.6 percent yesterday, to around $1.065 from $1.077. The reason may be the announcements of the heads of the European Central Bank relating to interest rate hikes in the Eurozone. The bank wants to follow a mild monetary tightening cycle.
The European Central Bank decided to end its net asset purchases and signaled it would raise interest rates by 25 basis points in July, leaving the door open for a larger hike in September.
The ECB simultaneously lowered its economic growth forecasts and raised its inflation forecasts. The central bank expects annual real GDP growth of 2.8 percent in 2022, 2.1 percent in 2023 and 2.1 percent in 2024.On the price front, the new forecasts put annual inflation at 6.8 percent in 2022 These forecasts seem to indicate that the eurozone economy will soon reach its pre-evacuation position, where economic growth was also declining, but at least there was no inflation. Now the situation seems more difficult, because there are risk factors that could affect GDP growth negatively and inflation positively, leading to stagflation.
Apart from the Bank of Switzerland and the Bank of Japan, the ECB is the last of the major central banks to start raising interest rates. It is assumed that by spring next year, interest rates could be raised by 2 percentage points, which could increase the deposit rate to 1.5 percent from the current -0.5 percent.
On the other side of the Atlantic, investors are waiting for inflation data. Meanwhile, the dollar index has strengthened to above 103 points, its highest level in three weeks. Today's inflation data could strengthen the case for aggressive interest rate hikes by the Federal Reserve. Last week's and better-than-expected U.S. employment report pointed to a solid economy and supported the Fed's aggressive stance against rising inflation. The Fed is expected to raise rates by 50 basis points at its June and July meetings, and a high inflation reading would raise expectations for further tightening in the second half of the year. On the other hand, if inflation slows, some might consider it to have peaked. However, the aforementioned slowdown in the rate of price increases could only occur after the summer season. After all, gasoline prices in the U.S. hit record highs in June, which will translate into CPI. The data will be published today at 14:30.
Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Forex service)
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