What's the buzz in 2022 Week #23?
Currency news in two major markets this week, the US and Europe, centers around inflation. Bloomberg reports a unique situation in the US, with utilities, gas and groceries’ prices rising at above 10%, unusual because these three categories don’t tend to all rise in unison. It’s also the first time we’ve seen anything like this since 1981. Gas is upto an average of $5/gallon and doesn’t appear to be making it's way back to normalcy any time soon.
This has the potential to create an extremely dangerous cycle → one of the biggest effects that high inflation has is an ability to foster extreme amounts of negative sentiment. Stories of people taking large dips into their savings accounts in order to just afford rising gas bills are in abundance, whilst others are completely scaling back their livelihoods in an attempt to still make do with what they have. Without government intervention, of which emergency measures are yet to be announced by the Biden administration, the US could be headed for an inflation-driven recession if wages can’t keep up with rising prices.
From a currency perspective, the EURUSD has been stagnating for the last couple of months, mainly because Europe is facing similar inflation issues to the US. We might be in a period of fluctuation for a little while longer as we wait to see what actions respective governments are willing to take to address this issue.
With the ECB looking slightly more proactive however, we might expect the value of the Euro to rise against the Dollar in the medium-term. On June 9th, the ECB announced they would increase interest rates for the first time since 2011 in an attempt to counteract their own inflation issues with another increase also possible in September. The economic logic is that discouraging spending, encouraging saving will keep a lid of demand-driven inflation and attempt to control spiralling prices.
The risk with any interest rate hike, and one as unusual as this, is of course gauging public reaction and ensuring the change has both the desired result but doesn’t overextend its influence. Recession is still looming in Europe and this is a way to kickstart it, but with the rate at which prices are rising right now and the worry that this could be a long term issue, there is a necessity here to re-establish some form of control, and the proactiveness in particular could help in stabilising the situation in Europe quicker than other economies.