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Sentiment Primed for ECB Interest Rate Decision, Fed Speeches

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After nearly three quarters of volatility triggered by high inflation and geopolitical pressures, it seems that market sentiment is primed for a jump in interest rates in the Eurozone ahead of the European Central Bank’s (ECB) monetary policy meeting.

The ECB meets on Thursday, September 8, and is expected to raise its key interest rate from 0.5 percent to 1 percent. The Eurozone’s inflation rate reached a record high of 9.1 percent in August, increasing the risks of entrenched high prices weighing on consumer spending power.

With the EUR at multi-decade lows against the USD, the bloc’s single currency may be at a disadvantage during trades for goods and services, but the EU’s exports have been rising steadily since April. Exports from the EU increased from 22.1 billion in May to 22.5 billion in June, reflecting a five-year high. This contributes to overall economic growth and cash flow as Europe struggles with the fallout from the war in Ukraine.

Monetary policy makers on the other side of the EURUSD currency pair are set to make a speech on the same day as the ECB’s interest rate decision. Federal Reserve Chairman Jerome Powell is likely to maintain the central bank’s hawkish rhetoric after a landmark speech at Jackson Hole just over a week ago.

Mr. Powell warned of more pain stemming from high inflation and the need for rising interest rates. The trading markets reacted with safe-haven buying, strengthening the USD against other currencies as investors shrugged off the chances of a deeper recession in the US. Market sentiment focused instead on the prospect of rising returns on USD-denominated assets like Treasury Bonds and the strong Non-Farm Payroll figures in August.

Central banks from Canada and the UK are also set to release monetary policy updates today. Bank of England Governor Bailey will give a speech this morning and market participants are looking for clues as monetary policy in a region where inflation reached double digits and is the highest of the G7 countries.

Lastly, Bank of Canada (BoC) announces its latest interest rate decision later today. The BoC is expected to hike its key rate from 2.5 percent to 3.25 percent. If there are any surprises in the BoC’s monetary policy, it could impact on the CAD currency crosses.

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

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