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On January 30, Rabobank said that at present, Trumps plan has not substantially changed the economic outlook for the euro area. Therefore, there is no reason to expect the ECB to change its rate cut route at this time. The ECB Governing Council increasingly expects inflation to converge to the 2% target during 2025, which allows another 25 basis point rate cut at the January policy meeting. However, uncertainty in the future remains high. Therefore, although the ECB may be inclined to cut interest rates further in the coming months, we believe that the ECB also wants to maintain its flexibility. Lagarde may avoid providing any forward guidance. Overall, we expect the ECB to cut interest rates three times, reducing the deposit rate to 2.25% by April, based on the assumption that potential inflation will be stickier than the ECB expects.On January 30, ABN AMRO said that the European Central Bank will almost certainly cut interest rates by 25 basis points today, reducing the deposit rate from the current 3.00% to 2.75%. As for what will happen next, much depends on the tariff policies of the new US government and how they affect trade and inflation. At present, no ECB official has made a case for an accommodative policy stance, and most officials seem to be taking a wait-and-see approach, which is logical. However, if the ECB indicates that its views on the impact of tariffs on the economy are taking shape, this may indicate a more dovish stance. US tariffs will have a negative impact on economic growth in the euro area and will also lead to its deflation. This is because the direct upward impact of tariffs on inflation is moderate, while the indirect downward impact on inflation through global trade and falling commodity prices may be huge. This is also an important factor in our view that the ECB policy rate will eventually fall to 1%.Deutsche Banks European shares fell 5% after its fourth-quarter profit fell short of expectations.Futures news on January 30, there are reports that the EU proposed a ban on aluminum imports from Russia, and supply concerns resurfaced. London aluminum performed strongly. As of 3 pm, London aluminum rose by $4, or 0.15%, to close at $2,624. The results of the Federal Reserves interest rate meeting were finalized, maintaining the original interest rate, and there is no rush to cut interest rates in the future. The news is bearish, and London aluminum may still be under pressure in the short term.The European Stoxx 600 index rose to a record high and is now up 0.25%.

[Hot talk] A must-see for Forex investors! As Fed's zero interest rate will be maintained until 2023, there are the three possible effects on the economy

Eden

Oct 25, 2021 14:05

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Forex War

QE enables more efficient circulation of global capital, and foreign exchange will become an important medium. Investors use the foreign exchange market to buy stocks, bond markets, futures markets, and even real estate markets in various countries. The foreign exchange market fluctuates violently. For foreign exchange investors who want to profit from it, or do not want to lose money, they have to look at the exchange rate cycle under QE.


QE continues to depreciate the U.S. dollar, while gold and the euro appreciate. This is also what is happening in the investment market. However, after the implementation of QE for a long time, the foreign exchange market will enter a major reversal stage. During the period, the US dollar will begin to stabilize and rebound. The main reason is that the US economy is gradually improving. The Fed will gradually withdraw from quantitative easing, causing market funds to flow into the US dollar. The economy will have the opportunity to follow in the US. Gold and the euro will fall sharply at this stage. The improvement in the US economic environment will also attract capital to continue to flow into US dollar assets, and US stocks will rise.


For example, since the 2008 financial tsunami, the United States has introduced three QE policies. From the attached EURUSD weekly line, we can see that after each QE launch, EURUSD will rise, and when the QE ends in 2014, European and American currencies have fallen sharply for several weeks.

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Inflation

Under the economic contraction, the liquidity released by QE to the market will not cause inflation in the short term. However, when the economy improves and investors restore confidence, the excessively released liquidity may be transformed into inflation. As QE stimulated the speculative atmosphere in the market, funds flowed to the stock or property market, triggering a sharp rise in asset prices.


Capitalists will be the winners under QE, and the actual wages of ordinary citizens will shrink. But the paradox is that the central bank wants to stimulate consumption, but consumers may be more cautious in the economic downturn. Many people choose to save, which reduces the circulation of money in disguise.


Rising of Zombie companies

Zombie companies may be arise. Some companies are already on the verge of bankruptcy under market competition, but they can barely maintain operations because of subsidies and low-interest bank loans. Because such companies are actually lacking in competitiveness, if the central bank gradually raises interest rates in the later period of QE, these companies are bound to close down, which will trigger another wave of unemployment.


Sum up
QE also brings many problems. First, if economic activities fail to cooperate, the most direct problem is to exacerbate the disparity between the rich and the poor; while hot money floods the market, loans increase, and funds flow to the stock market and property market. If QE continues for many years, it will form bubble assets in the long run. problem.

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