KEY POINTS:

  • The monetary policy decisions of the Fed and the ECB have global consequences.
  • If the positions are relaxed, even more, the USD and the EUR will fall.

EXPANSIONIST POLICIES OF CENTRAL BANKS

A new report by the rating agency Fitch, “Broader change in the direction of global monetary policy since 2009,” highlights recent changes in direction made by global central banks as economies around the world continue to struggle with lukewarm growth and inflation below the target.

The report highlights a “pronounced change in the balance of monetary policy direction in all geographies in the last six months” with more than a third of central banks, in the BIS database, declining in the last six months

This monetary change, from the tightening to loosening, is due to the deterioration of the global growth prospects, the growing concern for trade policies, the fall in manufacturing and trade and the “silenced movements in world inflation trends in the last 12-18 months. “

The report highlights that the change in the Federal Reserve’s policy of restriction towards flexibilization in early 2019 had a global impact, while the recent signs of the renewed loosening ECB, after stopping bond purchases in December 2018, “They could also have had a strong impact on the configuration of global politics.”

As central banks relax their positions, their currencies, under normal circumstances, weaken as the interest rate differential against other currencies is reduced. However, as other central banks are now cutting rates at the blocking step, the general differential between several currency pairs remains slightly modified. With the main central banks seeking to further weaken their currencies, to try to deny perceived and real trade imbalances, the race to the bottom continues. It remains to be seen if greater monetary relaxation will have the desired effect or if new extraordinary policies must be unleashed to avoid the current global recession.

For FX traders, this means a renewed focus on central banks and the speeches of policy members. Currency pairs will see more volatility when central banks do not react as expected or if policy members unexpectedly reveal revised forecasts, internal disagreements, and new stimulus measures.