28.09.202111:00 Forex Analysis & Reviews: World central banks will continue stimulating economies

Euro traded horizontally on Monday, experiencing another growth problem after a downward correction last week, which occurred in the wake of planned changes in Fed monetary policy. At the same time, other world central banks are also preparing for future rate hikes, in response to growing inflationary pressure in both medium and long term. For example, following the announcement of the Federal Reserve that it may begin reducing bond purchases in November, the Bank of England hinted that it may raise interest rates this year. Norges Bank, on the other hand, has already increased its rates.

But many economists said the difficulties in choosing the path which the world central banks will take will not arise until the end of 2022, as only by then will support measures end.

Recently, the Organization for Economic Cooperation and Development (OECD) said inflation is becoming more stable, and official forecasts predict that consumer prices in G20 countries will rise by 3.7% this year, and then increase by 3.9% next year. But supply chain problems will continue to influence price pressures, not only in the automotive industry, but also in food and energy sectors. In fact, the fuel crisis in the UK alone, which erupted last weekend, shows how uneven and unstable things are now, even in developed countries.

Some countries also face potential stagflation, although inflation is expected to moderate slightly this fall amid the spread of the Delta strain.

As for other central banks, the Bank of Japan left its policy unchanged last week, not making a single hint of lifting stimulus. The People's Bank of China, on the other hand, began injecting short-term liquidity into the financial system, forced by the problems that arose with the Evergrande Group, which kept the markets in suspense all week.

Going back to Japan, Governor Kuroda Haruhiko said the central bank will continue to adhere to a super-soft monetary policy in order to sustainably achieve the inflation target. This is because they believe that even if inflation rises gradually by the end of 2023, it will still not reach the 2% target. Additionally, current measures still work despite the waves of COVID-19.

Similarly, the European Central Bank is opposed to reducing stimulus, although there are those who deem it necessary, afraid of potential sharp inflationary jump. But ECB chief Christine Lagarde answered: "There are some factors that could lead to stronger price pressures than are currently expected, but we are seeing limited signs of this risk so far."

Accordingly, economists at JPMorgan estimate that central banks in developed countries will add another $ 1.5 trillion on their net asset balances next year, while rates will rise by only 11 basis points over the next year to an average of 1.48%. They are also confident that the aggregate growth in global interest rates remains lower than in previous cycles of crises- this means that most central banks will maintain support for their economies next year at almost the same levels.

But many are counting on a change in the tone of central bankers amid fears that price increases, which were previously considered temporary, may now begin to really cause problems. The Fed's revised estimate of inflation stood at 4.2%, while the Bank of England expects inflation to exceed 4%. Germany also expects inflation to rise up to 4-5% due to the VAT cut last year. But next year it may decrease markedly, before going above 2%.

With regards to macro statistics, Europe reported that money supply growth in the area accelerated in August, while private sector lending slowed down. Broad money (M3) grew 7.9% y / y, slightly higher than the expected 7.8%. Lending, meanwhile, rose 3.1%, after climbing 3.4% in the previous month.

In Italy, foreign trade surplus fell to € 1.583 billion in August, much lower than the € 3.581 billion last year. Exports rose 15.7% y / y, while imports jumped 39.9%.

In the US, new orders for durable goods increased much more than expected. It jumped 1.8% instead of the projected 0.6%. The reason was the surge in orders for transport equipment - there was a jump of 5.5%.

All these put pressure on risky assets, so a lot depends on 1.1715 and 1.1735 because climbing above them will provoke EUR/USD to rise to 1.1760. But if bearish traders manage to push the quote to 1.1685, the pair will drop to 1.1660 and 1.1620.