Central banks return to the spotlight this week, which tends to stress investors, as they worry about the pace at which monetary policies in large economies are tightening and how this process will impact global economic growth.
Decisions from central banks are one of the most important factors that move prices of assets up or down, which means that they are closely monitored by traders and investors.
Currencies are indeed directly impacted by central bank changes in their monetary policy trajectory, depending on whether they add financial and monetary stimulus to the economy or not. Usually, a rate hike will be positive for local currencies, while lower rates will generally weigh on the given currencies.
The RBA increased its interest rates more aggressively than expected
On Tuesday 7th, the Reserve Bank of Australia (RBA) decided to raise their Official Cash Rates (OCR) more than what investors had anticipated, as the RBA voted for a 50 basis point increase to 85 basis points from 35 basis points. Moreover, the normalization of the Australian monetary policy is expected to keep going this year with more rate hikes to come.
While market analysts were not surprised by the RBA’s decision to raise the OCR today, especially following last month’s rate hike (the first since November 2010 according to CNBC) and the RBA’s guidance, but many were caught off guard by the unexpectedly high increase, as most expected interest rates to rise around 25 basis points.
The ECB should soon increase interest rates for the first time in more than a decade
On Thursday 8th, the European Central Bank (ECB) is expected to meet and give clear clues about upcoming rate hikes and tightening monetary policy, now that the Euro Zone is facing an rampant inflation situation with the CPI reaching 8.1% in May 2022 in the Euro Area.
ECB President Christine Lagarde detailed her strategy to lift main interest rates out of negative territory last month. The ECB’s minus 0.5 percent deposit rate should begin to rise next month, and should reach zero (or “slightly above”) by the end of September 2022. Today, the markets are currently pricing in a rise of more than 150 basis points by the end of 2022 according to Reuters.
Next week more decisions on interest rates should come
The Federal Reserve will meet on the 14th and 15th of June, while the Swiss National Bank will conduct its monetary policy assessment with a news conference on the 16th of June. The Bank of Japan, meanwhile, will conduct its monetary policy meeting on the 17th of June.
Investors in forex trading should, therefore, expect a bumpy ride ahead with highly volatile prices, especially with currency pairs including the USD, EUR, JPY, and CHF. While volatility could hurt your trading positions if markets go against you, it can also bring many opportunities you could take advantage of if you know how to exploit volatility in your trading and protect your capital against wild price movements.
