News of global financial markets 7/9/2022

Urgent: The Fed's tough statements push the dollar to a stronger start.. Currencies are suffering

The US dollar rose in early European trade on Wednesday, climbing to a 24-year high against the Japanese yen as traders anticipate more aggressive monetary tightening from the Federal Reserve.

The dollar index now stands at 110,528 against a basket of foreign currencies, up 0.30% against a basket of foreign currencies.

Helping the dollar's rally was the healthiest US economic data, as the country's critical service sector saw activity pick up unexpectedly in August, giving the Fed more room to raise interest rates sharply when policymakers meet later this month. .

Richmond Fed President Thomas Barkin said Tuesday, in an interview with the Financial Times, that the Fed should raise interest rates to a level that restrains economic activity and keep it there until policy makers are “convinced” that inflation is abating.

Traders are now pricing in a more than 70% chance that the central bank will raise interest rates by 75 basis points in September.

This aggressive action contrasts starkly with the accommodative monetary policy stance taken by the Bank of Japan, which sent USDJPY to a 24-year high, up 0.9% to 144.01. That's off the 144.38 level seen earlier on Wednesday, the pair's highest since August 1998.

The yen has fallen about 25% against the dollar this year, heading for its worst year ever, raising the possibility of Japanese officials' intervention.

Chief Cabinet Secretary Hirokazu Matsuno also told a news briefing earlier Wednesday that the administration would like to take the necessary steps if "rapid one-sided" moves continue in the currency markets.

Elsewhere, EURUSD rose 0.1% to 0.9911, not far from Tuesday's two-decade low, but helped bring down German industrial production by just 0.3% in July, better than the expected drop of 0.3%. 0.5% as the region's largest economy struggles to deal with rising energy prices.

The European Central Bank is widely expected to raise interest rates on Thursday as inflation is fast approaching double digits in the Eurozone, while EU ministers are set to meet on Friday to discuss the energy crisis hitting industry and straining households.

Also, GBP/USD fell 0.2% to 1.1490, away from Monday's 2-1/2-year low of 1.1444, with the Bank of England anticipating that the UK will enter a prolonged recession at the end of this year as citizens struggle Of the cost-living crisis.

The UK's new prime minister, Liz Truss, promised a massive support package early this week to tackle rising energy bills, and is likely to announce on Thursday that the government will spend up to 200 billion pounds ($230 billion) over the 18 months. coming.

The risk-sensitive USD/AUD was also trading 0.2% lower at 0.6721, while the Chinese Yuan against the USD rose 0.2% to 6.9665, with the yuan hitting a two-year low and just below the 7.0 level which It is widely watched, after data showed that China's trade surplus came in well below expectations for August, with both imports and exports disappointing amid the country's ongoing economic turmoil.

The Polish Zloty against the US Dollar was also down 0.1% at 4.7696 ahead of the last meeting of the Polish Central Bank later in the session. Policy makers are expected to raise the benchmark rate by 25 basis points to 6.75%, but this may be one of the last rate increases in this monetary tightening cycle as it shifts focus from fighting inflation to avoiding deflation.

Urgent: BlackRock .. the Fed will fail to reduce inflation and will not avoid recession

The US Federal Reserve confirmed that it will continue its tightening policy until it succeeds in returning inflation to the targets set by the bank, while bank officials believe that the fundamentals of the US economy will enable it to overcome the trap of recession.

However, there is another proposition on the other hand that sees the opposite.. Which is the question: Why will the Fed not be able to avoid a recession or reduce inflation to the 2% target? According to BlackRock.

Will not be able

The world's largest asset management fund says the Fed may not be able to avoid a recession, and may not be able to bring inflation down to the 2% target either according to BlackRock.

“The Fed will be surprised by the damage to growth from its tightening,” BlackRock analysts said in a recent note. The bank’s analysts believe a recession could occur as early as 2023, most likely before inflation drops to 2%.

is not the solution

Markets expect the Fed to commit to raising interest rates after Chairman Jerome Powell's speech at Jackson Hole last month.

Analysts said higher rates would not solve the bigger problem, which is lower production capacity, which means less supply relative to demand.

Without addressing supply, the Fed would be forced to cut demand by 2% by raising interest rates to bring down inflation quickly, according to BlackRock analysts.

shocking surprise

“The Fed will be surprised by the growth damage from its tightening, in our view,” BlackRock analysts said. 

BlackRock analysts say the decline will not be deep enough to bring PCE inflation down to the Fed's 2% target, instead we expect inflation to continue near 3%.

Signs of failure

The Fed has been quick to cut high inflation this year, but so far, it has seen only a slight drop to 8.5% inflation in July.

Meanwhile, GDP has fallen for two straight quarters, indicating that the US is already in a technical recession, and that supply bottlenecks from the pandemic remain in key markets.

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