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Battle for Economic Stability Continues

Plus500 | Monday 05 September 2022

As we draw further into 2022, it seems that some of the defining trends of this year’s economic news are far from fading away. With concerns about the near-term strength of the global economy rising, traders on both the Stock and Forex markets are responding in tandem.

Inflation and the economy

Clouds Gather Over America

The significant travails facing the world’s largest economy have occupied an outsize proportion of headlines in recent months. Seemingly contradictory economic factors have consistently kept analysts and average citizens alike guessing as to whether a return to relative stability or a broad-based recession is in the cards for the American marketplace. While inflation is still at the highest levels many Americans have experienced in their lifetimes, the latest earnings season has been generally positive and relatively few are out of work according to August’s jobs report. (Source:Market Watch)

The post-coronavirus period of economic growth quickly pushed inflation rates to the highest levels experienced by U.S. consumers since the stagflation era of the early 1980s, prompting the Federal Open Market Committee to embark on a path of rapid interest rate hikes in an effort to bring price increases closer to the ‘ideal’ annualised rate of two percent. However, this speedy switch to the hawkish side of the monetary policy spectrum has repeatedly raised recession fears.

It seems at the moment that the U.S.’ most senior policymakers are trying to strike the magic balance between cooling down the tempo of inflation and preventing the economy as a whole from going into retreat. However, opinions are divided as to whether this tightrope act, in the end, will reach the other side safely and soundly.

At the Fed’s most recent summit, which concluded on July 27th, the decision was taken to raise interest rates by 0.75% for the second time in a row. While many had foreseen such a move given the persistently high inflation rates observed in the United States, the spectre of a recession coming sooner rather than later reared its ugly head once again. Furthermore, in Fed Chairman Jerome Powell’s speech in Jackson Hole, Wyoming, on August 26th, he indicated that low economic growth may be a necessary side effect of the battle against runaway inflation given the interest rate hikes that are still to come. While New York markets have yet to open this week, the Nikkei 225 (Japan 225) and Hang Seng Index (Hong Kong 50) are down 0.1% and 1.1% respectively as of the time of writing. Whether major Indices will be able to shake off the deleterious effects of a risk-averse market mood in the near future is anyone’s guess.

Forex Fortunes Diverge

The uphill battle being wages by central banks against price increases across the industrialised world has not only influenced the trading outcomes on Indices; with key interest rate decisions set to be released in the coming days, major Forex pairs have been reacting as well.

The historic parity reached by the EUR/USD pair recently made headlines all over the world, but the British pound has also been losing ground against the greenback. Investors seem to be reacting to widespread pessimism regarding the efficacy of the financial tools at the disposal of the U.K. central bank for controlling inflation. In addition, recent political turmoil in the country leading to the resignation of Conservative Prime Minister Boris Johnson and uncertainty surrounding how economic policies in Britain may shift over the near-term under his successor may have been contributing factors to nearly 2% fall, as of the time of writing, experienced by the GBP/USD over the past week.

Down under, the Reserve Bank of Australia is expected to release its interest rate decision tomorrow. It’s expected by many that tomorrow’s hike will come in at 0.5%, with more moderate increases foreseen for the rest of the year. Over the past week, the AUDUSD has fallen by 1.7%, as of the time of writing.

In the Eurozone, the question of whether the European Central Bank will raise interest rates by 0.5% or 0.75% is still up in the air, and the decision is likely to be influenced by the upward pull on inflation rates exerted by high energy costs. Since last Monday, the EUR/USD has fallen by nearly 0.8% as of this morning, touching a twenty-year low before recovering slightly. (Source:Reuters)

All in all, it doesn’t seem as if inflation will make its way out over the very near-term. How national government and traders alike attempt to grapple with this issue will continue to have an effect on markets and the lives of ordinary citizens alike for some time to come.


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